The Stock Market

A virtual meeting place where buyers and sellers come together to exchange allotments of ownership (shares) of publicly-listed companies is an auction-house and runs not unlike any house auction. The reason for buying and selling shares is investment – use money now to hopefully make more money in the future. Buy 100,000 shares of a company that has a total 10,000,000 shares issued and you in effect buy (own) one hundredth (1/100th or 1%) share of that company.

And with share ownership come potential rewards.

Using the above example it would include a 1% share of the company profits (paid as a dividend) and a 1/100th right to determine how the company is run. This latter privilege is commonly exercised at the company’s Annual General Meeting (AGM), where each shareholder has the right to vote on various company policies and practices, including the appointment of its board. Also, part or the entire allotment of shares in a company can be sold at any time, on the stock market – hopefully at a higher price than bought and a profit made.

The two major ways to profit from the purchase of shares — the share price may rise and you may sell part or all of your allotment (capital gain), and also from your share of dividends paid out of the company’s profits. Of course, if and when you sell all your shares, you cease to be a part-owner of the company and lose all privileges and rewards that this entails. Conversely however, if the company or the economy falter, or because of other local or global financial or socio-political instabilities, and the share price falls, should you then SELL your allotment, you will have lost money.

The ‘auctions’ themselves are run and controlled by various stock exchanges, with more or less government regulation – to minimise corruption and underhandedness (e.g. insider trading’). Shares are put on the market by sellers, and purchased by buyers. Stockbrokers in effect are the auctioneers of the stock market. They are the middle men. They earn their money as a percentage of each transaction (commission).

When a company or an economy is doing well and people’s expectations are of good times ahead, there are generally more buyers than sellers of individual companies’ shares, and the share price will reflect this demand, people will be willing to pay a higher and higher price for that stock. Conversely, in gloomy times, sellers may outnumber buyers, and the share price is forced down — owners of shares are happy to accept lower and lower prices for their shares — they are in effect putting their shares on ‘SALE’, to the highest bidder. (If you need to sell your shares, but there are no bidders at the price you want, then you will be forced to drop the asking price for your shares.)

The transactions are processed by a central computer and need to balance out at the close of each trading day. For each BUY there should be an equivalent SELL. The financial industry uses various ways to monitor the state of the stock market. One way is by use of indexes. For example, the Dow Jones Industrial Average (DJIA) or ‘Dow’. This index uses a handful of representative companies which in theory gives a gauge to the general performance of business and industry; in terms of the market closing prices. The Dow is “up” or “down” – it is up or down relative to the previous days closing level; and this is used as a gauge of investor sentiment or market mood. Minor day-to-day fluctuations in the indices are not seen as important but any major ‘advance’ or ‘decline’ in the Dow is viewed with buoyant optimism or dreary pessimism, respectively.
And that is how the stock market works.

But beware: this is a net zero-sum game; for every winner there is a loser. Because of this the stock market and in particular stockbrokers have an infamous reputation as ‘sharks’ waiting to take ordinary investors money. The stock market however attracts people from all walks of life – part-time ‘mum-and-dad’ investors, companies, billionaires, consortiums or superannuation and financial houses which sell instruments for pensioners.

The key to TRADING is to think what most traders would do, do it first, and then SELL for a tidy profit. Alternatively, take a long-term (5-10 year) view and INVEST moderate amounts ($5 – $20,000) each in 6-12 trusted ‘blue-chip’ companies when they are selling at a historically relatively attractive price – the ‘BUY and HOLD’ approach.

And:
1. Avoid multiple transactions - more commissions will eat into profits
2. Enjoy the experience, keep learning, and never invest more than you can afford to lose
3. Avoid the herd mentality and ideally make your decisions at a quiet time when the market is closed for the day - ignore market ‘noise’
4. Diversify your investments - do not put all your eggs in one basket but also avoid over-diversification
5. ‘THE INTELLIGENT INVESTOR’, by Benjamin Graham, and ‘ALL ABOUT DIVIDEND INVESTING’ by Don Schreiber Jr. and Gary E. Stroik.

Develop your own investing style, refine it, and stick to what works for you. You are not Warren Buffet, and neither is he you. Some people have made billions on shares, others have lost everything.