Stock market – the basics

A stock market is the aggregation of buyers and sellers of equities(shares in a company). The stock market is an exchange where business list the shares of their companies for trading.
A share is a controlling stake in a business, as an example a business Abc learning corporation valued at 1 billion naira that has 1 million issued shares. Each share is worth N1000 in value. 500,000 shares in the company owned by an individual or entity means that that individual or entity has 50% controlling stake and access to profits(dividends). The stock market is thus a platform to trade(buy and sell) shares of public limited liability companies.

Business enlist themselves on the stock market mainly because doing so gives the business access to capital from a wide range of investors, since the stock market involves the transfer of shares from one person to another, for new companies being listed, its a means for initial owners of the company to sell some of their shares to the public and cash out on their initial investment in the company. Being listed on the stock exchange as a lot of other benefits for business.

Prices of stocks listed on the stock market do not remain stagnant, the prices are constantly changing. Changes in the prices of stocks are caused by the forces of demand and supply which are driven by mainly by growth/decline in the economy, growth/decline of the business and market sentiment.

  • Growth/decline of the economy: when the economy of a country is growing, the business environment becomes generally conducive to conduct business, its easier for business to expand, innovate, and the consumers generally have more to spend, which results in more sales and profit. As an example ABC Learning corporation conducts training for personnel in government and organizations, in an economy that’s growing, businesses and organizations can afford to train many of their staffs, which will increase the sale of ABC learning corp. If ABC Learning corp made a total sales of 200 million and the cost of sales(staff salaries, management fees, cost of organizing training, office costs, etc) is about 100 million. The net profit of ABC Learning corp is 100million. The net earnings per share of ABC corp is N100 per share(profit/outstanding shares). ABC corp decides to pay out 40million to its share holders as dividend, which means each share will receive N40 as dividend. The N60 million naira left will be kept in the company as retained earnings. For that year ABC corp ABC corp as increased in worth, because it is profitable to own the business and the business as also increased in value and worth. The reverse will be the case if the economy of the country is weak, less organizations will be able to afford ABC corp training fees and will train few of their staff or none at all, this will result in reduced profit or a loss for ABC corp, which makes the company less valuable and profitable.
  • Growth/decline of the business: when a business has a competitive advantage such as technological advantages, government support, patents, growing demand for its products due to new trends or new uses, effective ways to reduce cost such advantages and others increase the company’s sales and profit in long run and makes the company valuable and profitable to own. The reverse will be the case if a company is restricted by government, has increasing cost of producing its products, can’t compete with other companies in its industry, this and other such related issues reduce the profitability and value of a company.
  • Market sentiment: issues such as reports of earnings, management reputation, government regulation, optimism or pessimsm in the media, hope, etc affect the image of a company in the minds of the public, the more positive a company looks he more people want it and the higher people have to pay to get it. The less positive peiple feel about a company the less people want it and he lower the prices go.┬áPrices of stocks rise when there is a high demand (more people want to buy and few want to sell) for the shares and the prices fall when when there is low demand(more people want to sell and few want to buy).

People buy shares of companies to own controlling stakes in the company, as an alternative to keeping money in the bank, as a form of investment, based on peoples advice. People buy shares for numerous reasons.

  1. ABC corp, appoints a former amazon products officer as Ceo, all of a sudden everyone wants to buy its shares, the prices jumps from N1080 to N1300 within few months of his appointment,
  2. ABC corp creates an online platform and launches it, the price of its increases to N1500, analyst release an estimate sales of N300 million, the price jumps to N1700.
  3. Results of the annual perfomance come out and the total sales is N220 million, the shares fall to N1620.
  4. The company hires more international executives, the price jumps to N2000, another sales estimate comes up projecting N320million.
  5. The price becomes N2200, another annual results come out, the company makes total sales of N350 million, the price jumps to N2500.

Stock marketThe list above is an example of trading shares according to the news. As positive news appear the demand for shares rise, thus driving the price upwards, when the results come out and expectations are met this further drives the price up, negative news and below perfomance reduces demand causing share price to fall.
One can make money following the above model, it is possible, but that’s not investing, its speculation the junior brother of gambling.
To be continued…

Adeola Adebowale

I am a believer in good.