The stock trading market uses a lot of specialised terminologies. However, you don’t need to understand most of it to trade in stocks. Here is a simplified guide to how stock trading works.
What Is Stock?
If you decide to start trading in stock, you will get an online broker to represent you. This broker will deal directly with the stock exchange. You will need a brokerage account to start trading. See stock trading South Africa for all your trading needs.
Stock comes from businesses and is used to obtain money for expansion, develop new product lines, or settle their debt. They do this by selling shares in their company. This is known as an Initial Public Offering (IPO) where shares become available for the public to buy them. The marketplace where these shares can be found is the stock market which consists of various stock exchanges like the Johannesburg Stock Exchange (JSE) in South Africa and the New York Stock Exchange in America. This is where buyers and sellers trade, through a broker.
The stock exchange holds information on all stocks, such as the supply and demand for a type of stock and the prices of each.
Why Buy Stock?
When you buy stocks, you are investing. If a company does well, the value of its stock goes up, and as you hold some of its stock, the value of your investment also increases. This means that you can hold onto the stock in the hopes that it keeps getting more valuable, buy more shares, or you can sell your existing stock for more than you paid for it and make a profit.
Having stock in a company gives you a share in its ownership, which comes with some voting rights if you are interested in taking that route. Most people stick to increasing their investment.
Another benefit of having stock is that it may pay dividends. This does not apply to all stock. When dividends are paid, this is done quarterly.
Risks of Buying Stock
If you invested R10,000 by buying a company’s stock, you risk losing all of your investment if the business becomes bankrupt and cannot pay out its shareholders. But you cannot lose more than your actual investment. You won’t have to pay anything.
Otherwise, if the share price falls, your stock would decrease in value, but you would still have something of your initial investment left over unless it falls to zero.
The value of share prices can fluctuate in the short term without decreasing substantially in the long run. In that case, investors use a hedging strategy to diminish their losses. Another strategy is investing in the price of exchange traded funds (ETFs).
Risks of Trading Stock
The risks of trading stocks are greater than those involved in buying stock. You can borrow money from your broker to trade. This is accomplished by making a cash deposit towards a loan that allows you to buy a larger quantity of stock. You repay interest on the loan. This is known as trading on margin.
The broker can make a margin call by asking you to increase your deposit collateral. Else the broker sells some of your stock to make up this money. This will likely be at a price that will disadvantage you.
There are ways to minimise these risks. This involves stop-losses, which limit your potential losses.
Start small and take time to learn about trading stocks.
