STOCK EXCHANGE INVESTING
Stock Market Basics
The stock market exists as a way for entrepreneurs to finance businesses using money collected from investors. They raise funds by issuing what is called an initial public offering. In this way the sell a portion of their company to the public and the shares are listed on a stock exchange. In return for financing the company, the investor becomes a part owner of the company (shareholder). That ownership is represented by stock/shares — specialized financial “securities,” or financial instruments — that are “secured” by a claim on the assets and profits of a company.
A stock/share represents a share in the ownership of a company. It is a claim on the company’s assets and profits. A stock is also known as equity.
The ownership percent, of a company that you own is calculated by dividing the number of shares you own by the total number of shares of the company. Shareholders have a claim on a part of the assets of the company and part of the stream of cash those assets generate. As the company acquires more assets and the stream of cash it generates gets larger, the value of the business increases. This drives up the value of the stock in that business.
Shares/Stock are an ideal investment vehicle for individuals because anyone can own it; there are absolutely no restrictions on who can purchase it. No one does a due diligence on you.
In my opinion stock/shares are one of the most amazing wealth-creation vehicle ever conceived.
The main advantages of stocks as a way of investing are:
- Stocks allow you to build wealth slowly over a period of time. They do not require a heavy capital investment but can be built by setting aside an investment fund from your current income and buy slowly and consistently.
- Stocks allow you to build an investment portfolio that can catapult you into purchasing real estate or businesses. For example after about five years of investing small portions of our income, we managed to dispose a portion of our portfolio to purchase a dental practice in Bulawayo which based on our cashflow from the existing practice we could not have afforded.
- Stocks are near liquid which means they can be disposed partially and quickly in case of need. Whereas it is not possible to partially dispose your real estate investment, when invested in stocks you can dispose only the quantity that raises the funds that you need.
- Stocks provide a good reward from their growth which normally mimics real estate growth.
- Buying stock can be risky, since while the price of the stock may go up, it may also go down. There is significant fluctuations with stock investments and so can be stressful for a short term investor. But for long term investors, they can weather the storm.
- If the company goes bankrupt, then you could potentially lose all the money you invested in the stock. For example people who were invested in Trust Holdings in 2004 lost their investments when the Bank was amalgamated into ZABG by the RBZ.
However, that is what investing is all about. Taking risks, in the hope of making money on your investment, with no guarantee that you will make money. Generally with prudent investments strategies and knowledge, one can reduce the risks associated with stock market investments.
How the Stock Market Works?
The following quotation aptly summarises how the stock market works.
“Think of a stock market as a swimming pool. The water level is analogous to the stock price, and elephants represent institutional investors. If the elephants suddenly start stepping into the pool (buy the stock), the water level (the price of the stock) rises quickly. But if the elephants get spooked and leap out of that pool (or sell the stock), then the water level (price of the stock) will fall rapidly.” Unknown