Understanding Stocks and Shares: A Comprehensive Guide
Stocks and Shares: Basics
Nominal Share Value
The price written on the share and never changes, the price at which it was issued.
Market Price (Market Share Value)
Current trading price on the stock exchange, changes constantly and affected by supply and demand
Ordinary Shares
Give owner right to vote and receive dividends; are the most common type of share, shareholder who own shares and dividend distribution of earnings to shareholders.
Preference Shares
Higher claim on asset and earnings, preferred stock holders have priority when dividend are paid, don’t usually carry voting rights and have priority over common stock.
Categories of Stocks and Shares
- Blue chips: stocks in large reputable reliable and profitable companies.
- Growth stocks: are expected to regularly rise;
- Income stocks: with a history or paying high dividends;
- defensive stocks: are stable;
- value stock: investors think that are trading for less than they worth
New Share Issues
Companies which require further capital can issue new shares, first offered for shareholders. Capitalization to turn profits into capital by using new shares, they can also buy back some of their shares.
Bankruptcy
Inability to pay debt, to be insolvent; preference holders have a greater chance of getting their capital back.
Liquidation of Assets
When a company must sell its assets in order to pay debts, preference shares are repaid before others. Board lot: standardized number of shares defined by a stock exchange as a trading unit.
Company Law
3 Types of Business Entities
- Sole Proprietor: single person who owns all the profits and personally liable for all the debts or losses, can form a partnership, and us treated as a natural person.
- Partnerships: Smaller companies, not considered to be legal person, cannot own property, generally have a limited number of partners. (Publicly listed company: is permitted to offer its shares for sale to general public)
- Companies: group of people that are treated as a legal person: can own property, can enter into contracts, sue others and be sued and have shareholding members or shareholders (ones who invest and receive shares) they have: Shareholder, board of directors (people who manage the affairs of the company), regulators (responsible of control of a particular activity or area), third parties (person who is not party to an agreement but may have interest).
Limited Liability
Liability is limited to the value of a person´s investment in a company; separate personality treatment, allows natural persons to act as if they were a single composite individual.
Registering a Company
Can be performed by individuals, attorneys, or specialized agents, certificate of incorporation is issued once the company´s constitutional documents have been filed and statutory form,
Certificated of Incorporation
Document issued by a governmental authority granting status legal entity, and statutory forms, help define the existence of the company, regulate the legal and financial structure
Constitutional Documents
Define the existence of a legal entity and regulate the structure and control of the entity and its members. Consist of 2 documents:
- Memorandum of association: states the principal object of the company and location and articles of association which regulates the company´s internal management.
Going Public
Stocks and Shares
Represent part ownership of company, if you own one you have stock in a company, both terms are used interchangeably, equity can also be used to describe stocks and shares but also for other areas, shareholders own shares in company and stakeholders can own shares but also other type of investments.
Stock Market
Place where stocks and shares of listed quoted company are bought and sold.
Conversion from Private Company to a Public Limited Company
Shares of a company are sold to outside investor (unicorns are private companies valued at 1 billion dollars or more which go public).
Process
- Due diligence report: company hires independent accountants to produce a due diligence report (due diligence: detailed examination of a company and its financial situation);
- The prospectus: explain its financial situation senior management and financial result from previous year (prospectus: invite the public to buy shares);
- Initial public offering or flotation: offers shares of its stock to public investors known as an initial public offering (IPO);
- Underwriting: Guarantee from an investment bank to purchase the shares if there are not enough buyers (underwrite: promise to purchase unsold shares)
Investing in the Market
Investors
Person who provides capital in hopes of return on investment, there are low-risk investors and high-risk, (portfolio is the collection of investment owned by an investor).
Stockbroker
Trades with the market makers, regulated individual who trades shares for clients, majority of shareholders place their buying and selling orders with a stock broker.
Broker or Brokerage Firm
Firm or a registered investment advisor affiliated with a firm, brokers are the link between the investor and the stock market, they don’t own the securities but acts as an agent for the buyer.
Day Traders
Practice of buying selling within the same trading day, known as active traders.
Speculators
Investors who buy and sell shares rapidly in hopes of making profit, include: day traders, short position (agree to sell stock in the future at their current price before they own them), long position (owning the security or other asset recorded in the account)
Return on Investments
- Dividends: distribution of part of company´s earning to shareholders;
- Retained Earnings: profits which a company keeps and reinvest in itself;
- Capital Gains: increased value of a capital asset.
Markets
- Primary: known as new issues market, new shares are sold for the first time, deals with the IPO and high volatility;
- Secondary market: shares can be repeatedly resold, typically a stock exchange. OTC (over the counter markets): trading of shares between two parties without the supervision of an exchange, less regulation (trade easier), securities not listed.
Measuring of the Market
: stock indexes: select group of important stocks which are used to show general changes in a stock market; A crash: indexes plummet suddenly; Bulls: expect prices to rise; Bears: expect prices to fall; Stags: buy new share issues hopping they will be oversubscribed.
Margin: borrow money from a broker to purchase an investment
Moving average: stocks average price per share during a specific period of time
Rally: Rapid increase in the general price level of the market or the price
Spread: difference between the bid and the ask price of a stock
Valuation:
What influence shares prices and the market? Financial situation of company, situation of the industry of company, beliefs of investors and state of the economy.
Predicting prices: price-sensitive information: news that can affect a company´s value
- Random walk hypothesis or theory: share prices increase or decrease randomly on a day to day basis, is impossible to outperform the market without assuming additional risk
- Efficient market hypothesis: price shares accurately reflect all relevant information at a given time. Previous changes in behavior can predict future movements, information include future expectation
Technical analysis: Basically, the belief that studying past shares allows for the ability to forecast future price changes
Fundamental analysis: The belief that a share has a true or correct value (intrinsic value), which might be different from its stock market value. Markets are not efficient. Fundamental Analysts study qualitative and quantitative, business and financial conditions and economic indicators.