Where to stock? The fools guide to understanding the stock market.
Trading on the stock exchange yields high returns for individuals, some owing to their success in their investments. However, it can be daunting for novices afraid of the uncertain results and not knowing where to begin putting their money.
Keeping this in mind, here is a simple guide to understanding how the stock market works.
Starting with the basics: What does the stock exchange entail?
The stock exchange is a platform that aids people to invest in companies by buying fractional ownership. The first modern stock market was created in 1611 after the Dutch-East India Company because it was first publicly traded.
Being able to make this investment means that an individual or party is a partial shareholder of the company. In return, companies ease the obtaining of capital for research and development, which assists in the general growth of the enterprise.
Investors (shareholders) are rewarded via two methods: appreciation of shares or dividends.
Appreciation can go one of two ways. For example, Tsogo Holdings Limited share price was significantly affected during the initial covid-19 lockdown trading at R3.10.
As restrictions lifted and we returned to some sense of normality, the share price gradually increased to R11.17.
This represents a key example of how the appreciation of shares is subject to market factors, which drive the share price.
The second method is issuing dividends. This is often to attract more investors and the need to distribute profits to investors who aided the companies research, development and expansion.
As a potential investor, one needs to decide what type of investor you wish to be: What is your risk appetite? Are you willing to be exposed to risk? Can you afford to face such risks prior to investing in the stock exchange? The suggested way forward would be to consult with a wealth advisor or an expert.
The recommended methods to obtain an understanding of the markets is to:
• Read books such as “A beginner’s guide to the stock market” by Matthew R. Kratter “about the stock market and investment strategies
• Follow an experienced mentor to obtain guidance and to learn the tricks of the trade .
• Take online courses that give you the necessary certification. The Forex Academy in Centurion offers these courses.
• Obtain expert advice to establish your risk appetites, which Accensis can assist you with if you contact us:
• Keep abreast with news about the stock markets
In South Africa, the JSE (Johannesburg Stock Exchange) is the leading exchange in Africa, connecting buyers and sellers from across the globe. JSE is regulated and protects the listed companies and the investors through a rigorous number of regulations about raising capital legally.
In addition, companies are required to fulfil financial and governance reporting requirements while also assisting to enforce shareholders rights and responsibilities.
The JSE is, in turn, regulated by the Financial Sector Conduct Authority (FSCA), which issues an operating license and ensures it conforms to strict licensing conditions and laws. The FSCA is a government entity that oversees the market conduct of financial institutions in South Africa.
Individuals must buy and sell listed securities via a member company of the JSE, who act as stockbrokers and charge a commission for their services. You pay various charges and taxes for trading, including securities transfer tax, VAT on brokerage fees, and trading fees for STRATE (the company that affects and clears every trade on the JSE and ensures that trades do not fail).
These fees make up part of the income earned by the JSE; thus, the more significant the daily trading volumes are on the exchange, the higher is its own earnings.
Why are stock exchanges so important?
The key is that they provide asset price transparency for buyers and sellers in real-time, reacting quickly to the daily news flow, whether positive or negative. Professionals try to forecast where company earnings are heading and, therefore, where share prices should be.
Share prices in the present reflect those prospects. When fresh data or news comes in that confirms or discounts their view of the future for a company, they adjust their forecasts accordingly.
Inexperienced investors are at a disadvantage when trading on the JSE, despite the help of real-time online systems offered on the internet. With all the volatility and uncertainty in financial markets these days, it's difficult for anyone to be confident about investing their hard-earned savings wisely. However, with significant risks may come great rewards if you can play your cards right.