STOCK MARKET FREQUENTLY ASKED QUESTIONS
Have some more questions about the stock market? Here are answers to some common questions:
WHY WOULD I CHOOSE STOCKS?
Stocks are one of the most effective tools for building wealth, as stocks are a share of ownership of a company. You thus have great potential to receive monetary benefits when you own stock shares. Owning stocks of fundamentally strong companies simply lets your money work harder for you since they appreciate in value over a period of time while also offering rich dividends on a periodic basis.
WHAT INSTRUMENTS ARE TRADED IN THE STOCK MARKETS?There are various types of instruments traded in the stock market. They include shares, mutual funds, IPOs, futures and options.
WHERE DO I BUY STOCKS?Stock trading happens on stock exchanges. However, you cannot buy directly at the exchange. To buy stocks, you need to find a suitable broker who will understand your needs and buy stocks on your behalf. You can think of them as agents who will conduct transactions for you without actually owning any of the securities themselves. In exchange for facilitating or executing a trade, brokers will charge you a commission.
WHERE DO I FIND STOCK RELATED INFORMATION?
Some of the most accessible avenues to get stock information are the internet, business news channels and print media. You could alternatively access the JSE website and get all the information that you wanted within a matter of seconds.
WHAT ARE ADVANCES AND DECLINES?
Advances and declines give you an indication of how the overall market has performed. You get a good overview of the general market direction. As the name suggest ‘advances’ inform you how the market has progressed. In contrast, ‘declines’ signal if the market has not performed as per expectations. The Advance-Decline ratio is a technical analysis tool that indicates market movement. The ratio is calculated using the formula:
- Generally, it is seen that in bullish markets, the number of stocks that advance is more than the ones that declined; the converse holds true in a bearish market. The indicator – market breadth – is used to gauge the number of stocks advancing and declining for the day.
- ‘Remains unchanged’ is a term used if the market scenario shows no advancement or decline compared to the earlier day.
- Advances and declines are calculated from the previous day’s closing results. However, a market with an advance-decline ratio that is significantly down or up may have a hard time reversing out of that direction the next day.
You cannot invest without conducting research. Often, many analysts and brokerage firms undertake their own stock market research keeping in mind the economy, industries, currency valuation, and so on. They often use public data from institutions like the Reserve Bank speak to experts as part of their research. This is not easily possible for retail investors. As a result, findings of such research are extensively followed by investors, which also give a buy or sell recommendation for specific stocks.
HOW CAN YOU QUALIFY THE MARKET AS BULL OR BEAR?
Bull and bear markets signify relatively long-term movements of significant proportion. Hence, these runs can be gauged only when the market has been moving in its current direction (by about 20% of its value) for a sustained period. One does not consider small, short-term movements that last for a few days, as they may only indicate corrections or short-lived movements.
WHAT IS BOTTOMING OUT?
Stock prices move in trends – an upward and a lower trend. During periods of bear markets, prices keep falling. However, there will come a time when the market starts to look cheap. This is when it starts to rise again as people start buying slowly. This phenomenon when the market free-fall ends and the rise begins is called bottoming out.
Similarly, on the higher end, there will come a point when too much buying has made the stock costly. Traders then start selling in droves to book profits. So, the price does not rise beyond this level. This is called ‘peaking’.
WHAT ARE THE VARIOUS TYPES OF THE RISKS ONCE I START TRADING?
This is the risk of investing in the stock market in general. It refers to a chance that a security’s value might decline. Although a particular company may be doing poorly, the value of its stock can go up because the stock market value is collectively going up. Conversely, your company may be doing very well, but the value of the stock might drop because of negative factors like inflation, rising interest rates, political instability etc that are effecting the whole market. All stocks are affected by market risk.
Industry Risk
This is a risk that affects all companies in a particular industry. This is because the companies in an industry may work in a similar fashion. This exposes them to certain kinds of risk unique to the industry.
Regulatory Risk
Virtually every company is subject to some sort of regulation. It refers to the risk that the government will pass new laws or implement new regulations that will dramatically affect a business.
Business Risk
These are the risks unique to an individual company. It refers to the uncertainty regarding the organization’s ability to conduct its business. Products, strategies, management, labor force, market share, etc. are among the key factors investors consider in evaluating the value of a specific company.