Stock Trading

Stock TradingSchool: Stocks also known as shares, equities or securities represent part ownership of a company. Investors in a public company listed company (plc.) get the rights to share in the future income and value of that company. Stock TradingSchool and change in ownership from one investor to another on the exchange.  Some of the largest ones are the New York Stock Exchange, the NASDAQ, Tokyo, London, Hong Kong, Shanghai, Toronto, Frankfurt, Sydney and Mumbai. Shares

Buying stocks gives the investor a claim on a company’s assets and earnings. If you own 100 shares of a company that has issued 1000 shares, you own 10% of that company. Shares are issued to raise capital and it is up to the company how many shares they wish to issue.

A company needs to raise $1,000,000.  They decide to issue 250,000 shares at a cost of $4 per share. An investor buys 10,000 shares at a cost of $40,000. In five years the company is now valued at $2,000,000. Each share is now worth $8 ($2,000,000/250,000). The value of the investor’s shareholding has increased from $40,000 to $80,000.

The process of issuing shares is known as an Initial Public Offering (IPO) or flotation. An IPO helps to raise capital, increase the shareholder base and provide liquidity for the exchange of shares. The company usually engages the services of investment banks/securities dealers to facilitate this process. Typically a syndicate of investment banks will underwrite the issue. The bank will research the company and set a value for the stock. They make money through the spread between the price they pay for the stock and the price at which the stock is sold to the public. The primary market is the market when securities are sold for the first time to investors. The public can then buy a company’s shares in the secondary market i.e. on the stock exchange.

The company raises capital through the IPO. They don’t receive any money through the subsequent trading of its shares on the stock exchange.  This raises the question as to why companies are so concerned with their share price when they don’t receive any more money through the stock market.

The stock market is like a voting mechanism and the share price “should” reflect the underlying financial health or otherwise of a company. A company that is consistently profitable and maintains strong earnings will be able to meet its debt requirements and will attract investors. A company that is performing well will likely be able to raise finance at a cheaper rate. Furthermore, their shares will be in demand if they choose to raise more capital by issuing more shares. On the other hand, if a company’s share price has a significant decline they could be at risk of a takeover.

Ultimately the shareholders are the owners of the company so management will wish produce profits for them. A declining in stock tradingSchool price could be the result of poor management and could cost them their jobs. In addition,  the management or founder of the company often still hold a significant amount of shares so obviously it is in their financial interest to maintain a high share price.

Ordinary or common shares are the types of shares typically bought by the public. Ordinary shareholders have voting rights, limited liability and a share in the assets in the case of insolvency. Shareholders elect directors to run the business. They are also entitled to a share in the profits of the company which is often paid in the form of a dividend. The company, however, may or may not choose to pay out a dividend. They are not fixed and vary according to the profitability of the company.

Preference shares rank above ordinary shares. In the case of insolvency they receive their share capital before ordinary shareholders. Preference shareholders have restricted voting rights but usually receive regular dividends which are predetermined at purchase.

From time to time companies engage in corporate actions which affects its shareholders. Types of corporate actions include bonus issues, stock splits, rights issues and mergers/takeovers.

  • A bonus issue is offering free shares to existing shareholders. It is a way of distributing profits to investors.
  • Stock splits involve increasing the numbers of shares available. For example if a share is trading at $20, the management may decide on a 2 for 1 stock split. The share that was trading at $20 is replaced by two at $10. Often this is done to increase the liquidity of the shares on the exchange. A reverse stock split is the opposite. In this scenario two shares of $10 could convert to one $20 share.
  • A rights issue is a method of raising more capital. New shares are offered to existing shareholders in proportion to their holdings. They are usually offered at a discount to attract subscribers.
  • A merger is when two companies decide to combine into one. A takeover involves a larger company buying out a smaller one.
  • A dividend is a pay out of a portion of company profits to its shareholders. It may be paid on an annual, bi-annual or quarterly basis and varies depending on the profitability of the company.

People often hear the media refer to the Dow Jones, the NASDAQ, S&P500 or FTSE100 rising or falling. These are stock indices. A stock index is a grouping of stocks whose prices are averaged to produce an index which is a gauge of how the overall stock market is performing. They are often weighted by market capitalization. Market cap is calculated by multiplying the number of shares outstanding by the price per share. The S&P500, for example, is an index of 500 of the leading companies in the US weighted by market cap.  Investors often group companies by sector in stock tradingSchool . Examples of sectors in the S&P500 stock tradingSchool index include:


Sector                                                                      Company

Energy                                                                     Exxon Mobil

Materials                                                                 Monsanto

Industrials                                                               General Electric

Consumer Discretionary                                          McDonalds

Consumer Staples                                                   Proctor & Gamble

Health Care                                                             Johnson & Johnson

Financials                                                                Goldman Sachs

Technology                                                              Apple

Telecom Services                                                     AT&T

Utilities                                                                    American Electric Power Company

Traders and investors may use Fundamental Analysis, Chart patterns and Technical analysis indicators to aid their decision making process in stock tradingSchool. Buying shares outright is not the only way of investing in the stock market however. Investing in Funds, Exchange Traded Funds (ETFs), Options, Contracts for Difference (CFDs), Futures and Spread Betting are alternative methods of gaining exposure to stock tradingSchool.

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