Through this post I am all set to introduce, especially the new kids and adults on the trading and investment block to the Stock Market. I am going to try and cover a range of topics; right from how do small family operated businesses mange to go public; to teaching new investors to read, understand, and analyse financial reports based on which they can make right investment and trading decisions.
Before we take this discussion further, let us clearly understand meaning of some of the most commonly used financial terms to begin with to avoid even slight confusion later. The first word is EPS, which stands for Earning per Share. This denotes the share in profit that each shareholder of the company is entitled to on each share held by him.
The next oft heard and used phrase is Going Public, it means a company making its Initial Public Offering; it’s slang for an IPO. IPO is when company offers its share for public to apply for and become shareholders of the firm and share in the growth and profit of the firm. Market Capitalization is another term, commonly referred to as Market Cap; it represents total value of the company which is arrived at by multiplying total number of shares of the company by its current market price.
The most important of all words is Share. It represents share in the company of the holder of the instrument who has the right to share profits, losses, right to actively participate in driving the company towards better results; holder of shares also has the right to access information and financial statements of the company and so on.
His rights etc will depend on policies of each company and may have a lot to do with number of shares held. When you set out to trade you will often hear the phrase ticker. Its full name is ticker symbol which represents a short form for a company and its hares.
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There are basically types of investors:
First types are what I would like to call non investors. They do not invest because of their own or their friends, and kin’s personal experiences. They have been told and absolutely believe that trading is nothing more than gambling; it’s a game of chances; and a place where you can lose all you have overnight.
Then there is this second type of investor who wants to invest but does not know how to go about it. So he plays safe and hires wealth mangers and financial consultants to trade on his behalf. Majority of times he does not participate in decision making related to which instrument to buy; of which company; for how long, etc.
Basically their brokers and traders are having a field day and this category is more dangerous than the first. At least the first category of people seems to possess the sensibilities that you should not allow anybody else to take decisions for your hard earned money.
In this post I am going to tread the path where I will be introducing the new stock traders to lessons on reading and understanding financial statements of companies. It will help them to work out simple calculations and evaluate the company whose share they or their wealth mangers are advising them to buy. Before the trader learns to evaluate a company, it is important that he understands the dynamics that apply to this kind businesses and its market.
A small family operated or a slightly large business decides to go public when it wants to expand its growth and reach and the funds required to implement the plans are not sufficient. So they make an Initial Public Offering in the market and collect money from their investors, by making them share holders of the company. Based on their performance and growth plan these companies make profits or losses every year which has a direct impact on the market price of such shares.
Factors other than profits, losses, dividends declared, reinvestment on dividend on growth and expansion plans etc that impact value of shares across the market happens to be human emotions. Our emotions of fear and greed drive the intrinsic value of the company.
Sometimes with so much force that the value arrived at of a company due to such emotions pushes even the best of companies to the brink of closing down or on the contrary same emotions flooded with artificial favourable wind based on false rumour or exaggerated results; or heavy debts that have not caught the attention of investor can increase the market value of such a company artificially and temporarily.
These emotions drive the market beyond real worth of a company does. Hundreds and thousands of traders are buying and selling stocks of the company at the same time. Someone’s buying decision is somebody else’s selling decision and this is what makes stock market so volatile.
The four min factors that cause price of stocks to swing are; investor’s approach to trading and speculator’s approach to trading. While latter evens out the market and speculator who is interested in short term gains drives the prices from one end to the other; the other factor that contributes to price swing is nature of stock; its monopoly, demand and supply decides the extent to which the prices fluctuate; Sometimes stocks fluctuate for a reason that has little to do with performance of company.
Like death of shareholder who owns the shares, suddenly his relatives decide to sell his holdings and this brings fluctuations; or a firm holding huge number of shares may decide to sell them because they may be requiring the money to meet expansion plan or get out of some financial crises etc. This has nothing to do with company’s performance however it does impact company’s market price.
As an investor you should keep an eye on the basic economic health and goals of the company you are considering to buy or sell shares of. Other than that market value will take its own course which may sometimes be beyond your logical understanding. Focus on building wealth; and keep your goals above everything else.