Stock Market

What is stock market?

A stock market, equity market, or share market is the aggregation of buyers and sellers of stocks (also called shares), which represent ownership claims on businesses; these may include securities listed on a public stock exchange, as well as stock that is only traded privately, such as shares of private companies which are sold to investors through equity crowdfunding platforms. Investment is usually made with an investment strategy in mind.

Benefits of stock market

The stock market provides the investor with several benefits and provides them with the easy handling of their money. These benefits include;

 

1. Gain received 

 

The ability of the market to generate the kinds of gains it does is the most essential component of investing directly in markets.

 

Stock markets have always stood the test of time, rising in value over time, even though individual stock values fluctuate daily, according to historical data.

 

Investing in companies with a consistent growth pattern and increased earnings every quarter, or in industries that contribute to the country's economic growth, will result in you steadily developing your wealth and growing the value of your investment over time.

 

As this value grows, there is a gain of money and the investors receive all the benefits over the money they had invested. It is said that a long-term investment in certain stocks is a guarantee of gain in the stock market.

2. Safety against Inflation

 

The fundamental goal of investments is to guarantee our future, but we must keep track of inflation regularly.

 

The gains will be nil if inflation and the rate of return on investments are comparable. In an ideal world, the rate of return on investments would be higher than inflation.

 

Stock markets and benchmark indexes have consistently outperformed inflation.

3. Liquidity or Ease of conversion 

Stocks are considered liquid assets since they can be easily converted to cash and have a large number of purchasers at any given time.

The same cannot be said for all assets; some, such as real estate, are difficult to sell. It could take months to see a return on your home investment. It is, however, much simpler in the case of stocks.

 

If the average volume of transactions is high then we can say that there are multiple buyers and sellers for that specific stock.

 

This liquidity of a stock market is one of the key benefits for the investors as the process never stops.

4. Investors gets the advantage of economy 

 The stock market is always a factor in a thriving economy, and it responds to all economic growth indices like gross domestic product (GDP), inflation, corporate profit, and so on.

 Investors in the stock market can directly benefit from a thriving economy, and the value of their investments rises in lockstep with economic expansion.

 

When an economy is growing, corporate earnings rise, and as a result, the ordinary individual's income rises.

As a result, customer demand rises, increasing sales. As a result, the value of your investment in a specific company rises, i.e. the share price rises.

5. Transparency 

The stock market in every country is regulated by a regulatory body, for example in India, the body is SEBI. the market functions by the guidelines of it and the bodies regulate stock exchange, transparency in the market, and protect the rights of investors. 

This means that when an investor invests in the stock market, not only his money but also his rights are protected by these regulatory bodies. This saves them from any kind of fraudulent activity done by the company they have invested in.

 

This makes the investments even secure and gives the investors the confidence and trust of no mishappenings.

 

Types of stock market 

1.  Growth stocks

These are the shares you buy for capital growth, rather than dividends. Growth stocks are essentially shares in those companies that are generating positive cash flows and whose earnings are expected to grow at an above-average rate relative to the market.

It’s worth remembering that some of the most successful firms in the US economy pay out relatively miserable dividends, such as Warren Buffett’s Berkshire Hathaway. If anything, they are the equivalent of a real estate investment. You buy and hold, riding the appreciating value of the asset. For the first few years you may not make much on the shares but if you hold onto them for long enough, and good quality managers avoid the pitfalls along the way, you’ll be well looked after when other investors hop on board at higher prices.

An example in Australia is CSL, the old Commonwealth Serum Laboratories. The shares are only yielding 1.62 per cent a year in terms of dividends but long term holders aren’t complaining. The former Government laboratories were privatised in 1994 at $2.30 a share and the shares have since gone up by a factor of more than 45 times. They broke through $100 in December and are now around $107 each.

2. Dividend aka yield stocks

Yield stocks, ideally, are those that perform well in bull markets while providing partial downside protection for investors in bear markets. They are the stocks of choice for the income-seeking investor.

The stock yield is calculated by dividing the yearly dividends paid by the company to the company’s share price. For example, if a company is expected to pay out $0.50 in dividends over the next year and is currently trading at $20, the dividend yield is 2.5%.

It is because of their dividend yield that the four big banks and Telstra account for well over half of retail investors’ shareholdings in Australia. They have been sold down since late last year on the reasonable basis that the economic outlook outlook is not rosy, but they’re not going out of business any time soon.

ANZ’s weak half year profit result last week saw the six month dividend cut from 95c to 80c, but a recovery in the share price on Budget Day, the day after the result, to just under $25, meant that the shares are yielding 6.4 per cent. If you are retired and not paying tax, the dividend imputation system means that if you buy at these levels, you’re getting more than 8 per cent in your hand per year.

While of course the higher the yield, the better, savvy investors are also aware that the stability in the cash flows and the business are also important considerations when purchasing shares for income.

3. New issues

Also known as Initial Public Offerings or IPOs, these are why the share market was created in the first place. These events mark the first time that companies make their shares available to the public. Once they’re listed on the share market, of course, any one can buy and sell but what is often lucrative is getting an allocation in the IPO before the shares list.

In times past, ordinary mortals found it hard to get access to those new floats unless the promoters were having trouble filling them. That’s changing now, thanks to technology, and the returns in recent times have been very good indeed. In 2015 IPOs returned 24 per cent on average.

We reported last week that investors in companies that have used our technology to buy the 25 mainly small companies we floated since they started in October 2013 would have found themselves ahead by significant amounts, particularly if they held on to the shares for a year.

We calculated that if they’d bought the full spread of 25 floats, investors would have been up

1. 5.1% if they sold on the first day

2. 9.3% if they sold at the end of the first month

3. 30.6% if they sold at the end of the first 3 months, and

4. 86.3% if they sold at the end of the first year.•

 

4. Defensive stocks

These are the shares that don’t go down so much when times are tough because they sell consumer staples. Typically, these types of stocks provide a constant dividend and report stable earnings regardless of the state of the share market as a whole.

Also known as non-cyclical stocks, these companies operate businesses that are not highly correlated with the economic cycle such as utilities, food, and (traditionally) oil. You don’t give up going to the supermarket, for instance, even in a recession.