- ContributedJamaica Stock Exchange (JSE) general manager Wain Iton (standing, right) talks to potential stock market investors at a JSE seminar in Portland recently. Many financial companies hold such seminars which give investors a chance to increase their knowledge.
Toni-Ann Neita, Staff Reporter
IT'S YOUR first time. You are very nervous and anxious and you are not sure what to do or expect. But you figure since everyone is doing it then you can too.
You are finally going to do it. You look deep into their eyes and you say it: "I want to buy stocks!"
The person you are speaking to is a stockbroker. You know they are the ones that can help you, but the problem is that you don't really know anything about the 'birds and the bees.' Of stocks, that is.
What exactly is a stock? Is it different from a share? What is the stock market and why do we need it? Where does the stock come from to begin with, and why do people want to buy and sell it?
In some countries in the world stocks and shares are two different things. In the United States, and here in Jamaica, the two terms are used interchangeably.
Stocks or shares, whichever term you are more comfortable with using, have the reputation of being risky, uncertain investments. Many people don't like the idea of buying them because they fear they will lose all their money, something they imagine wouldn't happen to cash being held in a deposit account, for example.
The jargon used by stockbrokers doesn't help either. It gives the impression that stock-picking and investing is a dark art, practised by a select few who are members of a club to which ordinary people could never belong.
Nothing could be further from the truth. As with anything else, knowledge is power, so if you are prepared to apply yourself in this field, you can gain control of your financial destiny.
A simple example
A person may own a small restaurant which is valued at $10 million. There may be ten people who would like to buy that restaurant but don't have $10 million. The owner of the restaurant may opt to 'divide' the restaurant into ten equal pieces and sell each for $1 million. In other words, the person might sell shares in the restaurant.
Each person who had bought a share would receive one-tenth of the restaurant's profits at the end of the year and one out of ten votes in any business decision involving the restaurant.
Alternatively, the owner could divide ownership into 10,000 shares, keep half for him or herself and sell the remaining 5,000 shares for $1,000 each. So, plain and simple, a share or stock is a means of owning part of a company. It represents ownership of a company's assets and profits.
You might be asking yourself why a company would want to issue stocks? Why share the profits with hundreds or thousands of people when they could keep all the profits to themselves?
The reason companies issue stock is to raise money which might otherwise have to be borrowed and repaid with interest. By selling some ownership in the form of stocks they get money that can be used for expansion, upgrading, and marketing, which in turn can boost the company's profits.
The stock market
Stocks in publicly traded companies can be bought and sold on a stock market, also known as a stock exchange. The New York Stock Exchange (NYSE) and the Jamaica Stock Exchange (JSE) are examples of such markets.
A stock market is like a 'supermarket' for stocks where anyone who wants to buy or sell stocks can go. Stock markets thus facilitate the exchange of stocks between buyers and sellers. Imagine how difficult it would be to sell shares if you had to call around to find a buyer.
Why do stock prices change?
Stock prices are changed by 'the market.' Buyers and sellers cause the prices to change as they decide how valuable each stock is based on their willingness to buy or sell the shares.
A stock is only worth what someone is willing to pay for it. In other words, the price of a stock shows what investors feel the company is worth.
Basically share prices change because of supply and demand.
Usually, if a company makes a lot of money the value of its stock rises because people are willing to pay more for it if the company is doing well.
There are other factors that affect the value of stocks.
One example is interest rates. If interest rates climb, stock prices tend to go down, because people can make good returns simply by keeping their money in banks and enjoying the high interest. This is less risky and much more of a 'no-brainer' than buying stocks.
Many other factors have an effect on the stock market- for example, the state of the economy. Companies tend to do well in a good economic environment, making their prices rise.
Yet another factor is publicity. If information comes out revealing something very damaging about a company, it should put downward pressure on the stock price and vice versa.
How to buy and sell stocks
A stockbroker is the link between you and the stock market, buying and selling stocks on your behalf.
To contact a broker you can check the yellow pages of the telephone directory or ask a more experienced investor to recommend one. Remember that you will be investing your hard-earned money so it is important that you be comfortable with your broker. Find one who will give you sound advice, but also listen to what it is you really want to achieve.
Based on the amount of money you have, discuss with the broker how best you should invest your money. There are costs involved in making an investment so you need to find what is a proper balance for your investments.
Listen to the broker, but understand that the investment decision is yours.
Before you buy stocks you need to clearly understand what your investment goals are. This will determine what stocks are best for you to buy and when you should sell them.
Track the price of your stock, for example by reading the Gleaner's stock reports.
To sell your stocks, contact your broker with clear instructions. The broker will sell them, deduct the sales commission and give you your money.
Fairly simple isn't it?
Buying tips
There is a common misconception that a stock that has risen will always come back down. This is false. Stock prices reflect the interests of investors, not the law of gravity.
If you want to profit from buying stocks, you should choose a company on a successful path to invest in. In deciding, it is important to realise that there are many factors about the company that must be considered. By analysing all of the aspects, you have a better chance of predicting whether or not the stock will rise in value.
These issues you should discuss with your broker, but it is also useful to invest in companies you are familiar with. If you buy a product or service and see that it is superior to the competition, then the company which produces it should be worth further investigation.
Never invest in something you do not understand. You may be lucky and make money from it, but you are far more likely to lose on such an investment.
When 'playing' the stock market, experts stress that you should only invest the amount of money that you can afford to lose. And if you can't afford to lose it? Well, you shouldn't be playing then.
