Basics of stock market Trading & Investing FOR BEGINNERS
Financial markets provide their participants with the most favorable
conditions for purchase/sale of financial instruments they have inside.
Their major functions are: guaranteeing liquidity, forming assets prices
within establishing proposition and demand and decreasing of operational
expenses, incurred by the participants of the market.
Financial market comprises variety of instruments, hence its functioning
totally depends on instruments held. Usually it can be classified
according to the type of financial instruments and according to the terms
of instruments� paying-off.
From the point of different types of instruments held the market can be
divided into the one of promissory notes and the one of securities (stock
market). The first one contains promissory instruments with the right for
its owners to get some fixed amount of money in future and is called the
market of promissory notes, while the latter binds the issuer to pay a
certain amount of money according to the return received after paying-off
all the promissory notes and is called stock market. There are also types
of securities referring to both categories as, e.g., preference shares
and converted bonds. They are also called the instruments with fixed
return.
Another classification is due to paying-off terms of instruments. These
are: market of assets with high liquidity (money market) and market of
capital. The first one refers to the market of short-term promissory
notes with assets age up to 12 months. The second one refers to the
market of long-term promissory notes with instruments age surpasses 12
months. This classification can be referred to the bond market only as
its instruments have fixed expiry date, while the stock market�s not.
Now we are turning to the stock market.
Stock market
As it was mentioned before, ordinary shares� purchasers typically invest
their funds into the company-issuer and become its owners. Their weight
in the process of making decisions in the company depends on the number
of shares he/she possesses. Due to the financial experience of the
company, its part in the market and future potential shares can be
divided into several groups.
1. Blue Chips
Shares of large companies with a long record of profit growth, annual
return over $4 billion, large capitalization and constancy in paying-off
dividends are referred to as blue chips.
2. Growth Stocks
Shares of such company grow faster; its managers typically pursue the
policy of reinvestment of revenue into further development and
modernization of the company. These companies rarely pay dividends and in
case they do the dividends are minimal as compared with other companies.
3. Income Stocks
Income stocks are the stocks of companies with high and stable earnings
that pay high dividends to the shareholders. The shares of such companies
usually use mutual funds in the plans for middle-aged and elderly people.
4. Defensive Stocks
These are the stocks whose prices stay stable when the market declines,
do well during recessions and are able to minimize risks. They perform
perfect when the market turns sour and are in requisition during economic
boom.
These categories are widely spread in mutual funds, thus for better
understanding investment process it is useful to keep in mind this
division.
Shares can be issued both within the country and abroad. In case a
company wants to issue its shares abroad it can use American Depositary
Receipts (ADRs). ADRs are usually issued by the American banks and point
at shareholders� right to possess the shares of a foreign company under
the asset management of a bank. Each ADR signals of one or more shares
possession.
When operating with shares, aside of purchase/sale ratio profits, you can
also quarterly receive dividends. They depend on: type of share,
financial state of the company, shares category etc.
Ordinary shares do not guarantee paying-off dividends. Dividends of a
company depend on its profitability and spare cash. Dividends differ from
each other as they are to be paid in a different period of time, with the
possibility of being higher as well as lower. There are periods when
companies do not pay dividends at all, mostly when a company is in a
financial distress or in case executives decide to reinvest income into
the development of the business. While calculating acceptable share
price, dividends are the key factor.
Price of ordinary share is determined by three main factors: annual
dividends rate, dividends growth rate and discount rate. The latter is
also called a required income rate. The company with the high risks level
is expected to have high required income rate. The higher cash flow the
higher share prices and versus. This interdependence determines assets
value. Below we will touch upon the division of share prices estimating
in three possible cases with regard to dividends.
While purchasing shares, aside of risks and dividends analysis, it is
absolutely important to examine company carefully as for its profit/loss
accounting, balance, cash flows, distribution of profits between its
shareholders, managers� and executives� wages etc. Only when you are sure
of all the ins and outs of a company, you can easily buy or sell shares.
If you are not confident of the information, it is more advisable not to
hold shares for a long time (especially before financial accounting
published).
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