INTRODUCTION TO STOCKS
1.1 What in the world is a stock!?
At its simplest form, a stock refers to a fraction of an entire company.
Let us use an elementary illustration. Oga Roja is a very enterprising man, one day he decides that he wants to become a cassava farmer, both to make money, and to feed the world. He starts off this venture at his backyard, and in the next year he makes enough harvests to feed his family and sell to a few neighbors. As the business looks promising, he wants to expand. Oga Dada decides to offer his expanse of land for a portion of ‘future profits’. Now sales multiply as supply has increased. But Oga Roja wants to expand further, buy more lands, buy machines to make farming more effective, open business branches for garri processing, starch production, and the likes, but he and Oga Danda can’t pull this one off on their own. A finance savvy friend then asks Oga Roja to list his company on the stock exchange. This friend explains to Oga Roja that the stock exchange is the place where he can find many more people like Oga Dada. He says, “These people will first assess your business, and those who are confident about your future will pay a certain amount in exchange for a document stating how much of your company they bought, but they do this primarily just to support you.” He further explains that “In the future, if you do well, those who doubted will turn around and want to buy these documents, and then the demand rises, but the former buyers will refuse to sell at the price they bought, so they sell at a higher price. Now over time Of a Roja, you will make all the money you want to achieve your dreams of making money, and feeding the world.”
Basically, according to this advisor, Oga Roja can produce and sell a number of legal documents indicating some degree of ownership of his company. This legal document, ladies and gentlemen, is what we call a stock.
The concept in our illustration is a broad idea of what happens with stock trading.
1.2 What is Stock trading not?
You may have believed some of myths that have held sway about stock trading. Sadly there are a lot of uninformed opinions about what stock trading is. Let us put your perception back in healthy shape, shall we?
First of all, stock trading is not gambling
This myth is ageless. While in gambling, you are unsure of the outcome (of course it depends purely on luck), stock trading is on the contrary an art that you learn. To gamble, you don’t have any homework to do to make sure your number is the winning number, with stock trading, you need to study the trends, learn how the market works and how to make it profitable for you.
The stock market is not exclusive to rich people and white-collar stockbrokers
This was once true due to high broker fees, but the internet turned things around. Today, the market is much more open to the public than ever before with all the information being even more widely accessible. Now, anyone can do their own stock research and monitoring. To add to that, brokerage firms now know better to woo investors with a minimal capital to get started, of course we all like to start small.
Psst, stock trading is not governed by mathematics
It is governed by purely sentiments and the unforeseen (shocks, bad news, negative developments, even baseless rumors), the mathematics only helps to guide you but does not guarantee anything. Here’s why; calculated expectations and forecasts for the future will never be perfect. The best practice would be to follow all the good and bad reports of the company you have invested in, or want to invest in.
It’s not a means to quick money
While this may be true ‘a few times’ for some aggressive, risk-taking day-traders, this is an opinion to do away with! The big picture of trading in stocks is for long term gains at the lowest risk possible, that’s how great investors got it right. It takes disciplined patience to grow money sustainably when trading stocks.
It’s not for the young and experienced only
Of course, that’s because 1) Information is everywhere; and 2) As far as making money goes, no time is too late!
1.3 Why Buy Stocks?
The major reason why people buy or invest in stocks is simply for:
Capital appreciation: We want the money we invest to grow and gain value over time. Why do we do that? Let’s break it down this way: let’s say you observed that Dangote Cement will increase in value soon, thanks to a new plant for cement production. You decide to buy 200 shares at say, N100 per share, so you spent N20,000, no stress. You hold your investments while your money helps Dangote expand and become more profitable. After 2 years, alas, due to confidence in the business the share price rises 150% to N250 per share. At this point if you decide to cash out, you get N50,000! Guys, investing in the right companies can have share price increase as much as 1000% in that same period, yes you heard it.
Income generation: Some corporations and companies give their shareholders a portion of their earnings. These earnings are called dividends – we will come back to this later. As an investor you may decide to take out your dividends every single time it’s paid, or reinvest it if you chose.
Ownership Privileges: This comes limited. Depending on the class of stocks you own, you can influence what happens with the company. You get to attend AGMs to vote for the people who you want to constitute the board. For more privileged shareholders, they get to even vote for or against proposals by the board.