LAST week, we looked at how businesses can grow by making use of the stock exchange market.
Today, we will look at how the stock exchange operates and how individuals and institutional investors can carry out their day to day transactions on stocks.
Hopefully, by the end of this article all the issues surrounding operations of the stock exchange will be demystified.
We will look at shares from the first time they are issued and subsequent transactions and the benefits of trading in securitised assets.
We have seen that shares are issued by companies to raise funds and the stock then continues to trade on the exchange.
Overall, stocks have risen over a long-term, which makes owning shares attractive. There are also additional returns of owning shares such as dividends, profit potential and voting rights.
It is a prudent act to buy shares in different sectors of industry as a way of diversifying the portfolio risk.
When you buy a stock you are buying a piece of the company. When a company needs to raise money, it issues shares.
This is done through an initial public offering (IPO), in which the price of shares is set based on how much the company is estimated to be worth, and how many shares are being issued.
The company gets to keep the money raised to grow its business, while the shares (or stocks) continue to trade on and exchange hands on the stock market, in this case the Lusaka Stock Exchange (LuSE).
What does it mean to buy a share in a company?
Share ownership entitles you to a piece of the respective undertaking and, therefore, entitles you to a vote in proportion to your shareholding at the company’s Annual General Meeting (AGM) on the operational decisions of the company such as the choice of the board of directors.
Shareholders also benefit from the future appreciation on the value of the company’s shares.
Empirical evidence reveals that shares may appreciate in value overtime and therefore, the shareholder benefits from the share appreciation through dividend payout and also the subsequent value of the shares at a later date.
Ron Wayne, one of the three original founders of Apple in 1976 sold his share of Apple for $800. These shares are estimated to be valued at $35million today!
This goes to demonstrate that once you buy shares on the LuSE at a lower price today, you may sell them at a fortune in the foreseeable future, depending on the performance of the company.
Additionally, we have seen that individual and other traders and investors continue to buy and sell the stock of the company on the exchange, although the company itself no longer receives any money from this type of trading.
The company only receives money from the IPO.
Speculative buyers, sellers and investors continuously trade in an undertaking’s stock even long after the IPO.
This is due to the fact that investors’ perceptions on the companies’performance changes over time.
This, therefore, results in investors either making losses or gains depending on whether their speculations and perceived value of the undertaking is in agreement with market forces.
Trading in stock is a game of risk and chance as the value of shares tend to fluctuate.
Good investment managers do not put their eggs in one basket but they diversify or spread their risks by holding stocks for a long time and also holding stocks from various sectors of the economy.
The ultimate goal of buying shares is to make money by buying stocks in companies you expect to do well, those whose perceived value (in the form of the share price) will rise.
As a sigh of relief, we should note that shares also attract dividend payments when the company declares a profit.
Investors seeking regular income from their stock market investments tend to be inclined to buying stocks that pay comparatively high dividends.
Competitive pressures between buyers and sellers may push the price of a stock down; sellers tend to become more aggressive because they are willing to sell at a lower price.
Buyers are also timid and only willing to buy at lower prices.
The price may continue to fall until the price reaches a point where buyer’s speculative behaviour intervenes and becomes more aggressive and willing to buy at higher prices, pushing the price back up.
We have so far seen how trading in shares and other securitised assets are carried out on the stock exchange.
We have also seen that individuals can buy shares as an investment and also for trade in them for future sale.
It is imperative for us to grow our personal investment attitude and participate in wealth creation and ownership in the economy by considering investing in shares and other securitised assets listed on the LuSE.
The author is the Managing Consultant at GN Grant Business Consultant, a fellow of the Association of Chartered Certified Accountants (ACCA), a Master of Business Administration (MBA) holder and a candidate for the Herriot Watt University (Scotland) Doctor of Business Administration