Beginner’s Guide: Class 2
WHAT IS A STOCK?
The Stock Ticker Is Not A Stock Ticker
“p.s. A share and a stock are just interchangeable term.”
What are we actually buying when we purchase a stock? Are we merely buying a stock ticker that move up and down every second?
In fact, a stock is much more than that. A stock or share, is a part-ownership of a company. That means that when you buy a stock, you are becoming a shareholder of the company behind the stock ticker. If you have invested in the stock of Telekom Malaysia or Singapore Telecommunication, you have in fact turned into a shareholder of these companies. This means that you are entitled to a percentage profits that the companies are generating.
For example, if you have bought 100,000 shares of Airasia Bhd at RM 3.00, it means you have invested (100,000 x 3.00) RM300,000 in the company. In June 2017, Airasia has about 3.34 billion shares outstanding. This means that the company’s ownership is divided into 3.34 billion portion and you own 1,000 portion of that total. Thus, you are a (100,000 / 3.34 billion) 0.003% owner of Airasia Bhd. So, all the profits that Airasia Bhd made in the future, you are legally entitled to 0.003% of them in the future.
Thus, we should view our investment in stock as a part ownership of the company. Behind each stock ticker is a business and by investing in it, we have become a business owner. We will be taking part in the growth and earnings of the company in the future.
What Is A Stock Market?
In essence, a stock market, as the name suggests, is just a market place for buyer and seller to buy and sell companies. A simple illustration would be to see the stock exchange as the “landowner” of the marketplace. They allow companies to list their companies on the exchange to sell part of it to the public. And like all markets, there would be unethical behaviors within it. For example, we can easily find beggars, thieves, scammers and polices in a night market. Similarly, in a stock market, we can find empty shell companies, market manipulators, regulators and fraudsters operating within it.
As investors, we need to be aware of these and not fall into the traps of these unethical operators.
How Does A Stock Market Work?
The stock market can be separate into two key markets; the primary market and the secondary market.
The primary market is basically what we commonly known as an Initial Public Offering (IPO). This is the first time a company come into the stock market. So, in an IPO, the company is selling its shares directly to the investors.
In this market, the new company would seek to list its company’s share on the stock exchange. With the help of intermediaries, it would prepare the company and promote it to the public. The public can then subscribe to its IPO, buying shares of the company directly at a fixed price.
Once the IPO process is completed and the company is successfully listed on the exchange, its stock would be free to trade based on the buyers and sellers in the secondary market.
The secondary market is basically what we are seeing in the stock market everyday. The buying and selling of shares of companies already listed on the exchange are all happening in the secondary market. In this market, the company itself is no longer selling shares directly to the investors. Instead, existing investors, both major and minority investors, can sell shares through the stock market to other potential investors. This is typically done through a brokerage house, which acts as the intermediaries for both sellers and buyers of the company.
Benefits Of Investing In The Stock Market
Besides investing in the stock market, some other asset classes to invest in might include:
- Private Equities (Investing in private companies)
- Venture Capital (Investing in Startups)
Yet of all these asset classes, stocks do have clear advantages over all of them. They are:
As the stock market is open on every business day, investors have the flexibility to buy in or cash out of their investment any time. This gives the investors a peace of mind that they are access their wealth for emergency if needed.
This is not the case for assets classes such as properties, private equities or venture capital where your funds might be locked up for years.
Wide Selection & Diversification
The stock markets give you the ability to invest globally at the click of your mouse. Every major exchange around the world has thousands of companies listed in them. Just within the markets in Hong Kong, Singapore and Malaysia, investors have close to 3000 companies to choose from.
For a well-diversified portfolio, we are only looking to invest about 15 to 30 companies. Therefore, investors have the luxury of choosing the best possible investment suited for their own needs and objectives.
Moreover, investors can also easily diversify across geographical markets and industries on the stock market. All you need is to buy companies exposed to different markets and industries or listed on different exchanges.
Low “Startup” Cost
The stock market is one of the few places where you can start investing with as little as a few hundred dollars. In Singapore and Malaysia, the minimal number of shares you need to buy on a particular company is just 100 shares. As shares in Singapore and Malaysia trades anywhere from a few cents to about $20 a share, all you need is a few hundred dollars to a few thousand dollars to start investing.
Hong Kong has an unusual system of minimal lot purchase which is different for each company. However, many stocks can also be bought with just a few thousand HK dollars.
Great Learning Place
Given the diversity of companies listed in the stock market, it is also a great place for investors to learn about businesses and the stock market. It allows you to experiment with different strategy and find the one that suits you the best overtime.
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