InvestingStockmarketBasics


STOCK EXCHANGE INVESTING

Stock Market Basics

The stock market exists as a way for entrepreneurs to finance businesses using money collected from investors. They raise funds by issuing what is called an initial public offering. In this way the sell a portion of their company to the public and the shares are listed on a stock exchange. In return for financing the company, the investor becomes a part owner of the company (shareholder). That ownership is represented by stock/shares — specialized financial “securities,” or financial instruments — that are “secured” by a claim on the assets and profits of a company.

A stock/share represents a share in the ownership of a company. It is a claim on the company’s assets and profits. A stock is also known as equity.
The ownership percent, of a company that you own is calculated by dividing the number of shares you own by the total number of shares of the company. Shareholders have a claim on a part of the assets of the company and part of the stream of cash those assets generate. As the company acquires more assets and the stream of cash it generates gets larger, the value of the business increases. This drives up the value of the stock in that business.

Shares/Stock are an ideal investment vehicle for individuals because anyone can own it; there are absolutely no restrictions on who can purchase it. No one does a due diligence on you.

In my opinion stock/shares are one of the most amazing wealth-creation vehicle ever conceived.

The main advantages of stocks as a way of investing are:

  1. Stocks allow you to build wealth slowly over a period of time. They do not require a heavy capital investment but can be built by setting aside an investment fund from your current income and buy slowly and consistently.
  2. Stocks allow you to build an investment portfolio that can catapult you into purchasing real estate or businesses. For example after about five years of investing small portions of our income, we managed to dispose a portion of our portfolio to purchase a dental practice in Bulawayo which based on our cashflow from the existing practice we could not have afforded.
  3. Stocks are near liquid which means they can be disposed partially and quickly in case of need. Whereas it is not possible to partially dispose your real estate investment, when invested in stocks you can dispose only the quantity that raises the funds that you need.
  4. Stocks provide a good reward from their growth which normally mimics real estate growth.

Disadvantages

  1. Buying stock can be risky, since while the price of the stock may go up, it may also go down. There is significant fluctuations with stock investments and so can be stressful for a short term investor. But for long term investors, they can weather the storm.
  2. If the company goes bankrupt, then you could potentially lose all the money you invested in the stock. For example people who were invested in Trust Holdings in 2004 lost their investments when the Bank was amalgamated into ZABG by the RBZ.

However, that is what investing is all about. Taking risks, in the hope of making money on your investment, with no guarantee that you will make money. Generally with prudent investments strategies and knowledge, one can reduce the risks associated with stock market investments.

How the Stock Market Works?

The following quotation aptly summarises how the stock market works.

“Think of a stock market as a swimming pool. The water level is analogous to the stock price, and elephants represent institutional investors. If the elephants suddenly start stepping into the pool (buy the stock), the water level (the price of the stock) rises quickly. But if the elephants get spooked and leap out of that pool (or sell the stock), then the water level  (price of the stock) will fall rapidly.” Unknown

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14 thoughts on “InvestingStockmarketBasics”

  1. WOW your insight is quite inspiring. i would however like to share my thoughts. I started a group called CASHFLOW at the Medical school (Parirenyatwa) in 2007 and we started playing the cashflow 101 by Robert Kiyosaki. By playing we discovered something (one strategy which worked for us then !!!!) you put 10% of your income into the market and buy XYZ then sell and move into a different asset class. This strategy helped because we did not make much money and sometime we would only afford 5 shares, however that inspired creativity and enabled me to pay for my masters in (15 000USD) Australia 1 year later.

    Right now looking at the ZSE there are bargains to be made with shares as low as 0.05c plus. Another aspect of the stock market is the Alternative investment market however this is for a sophisticated investor.

    I think if you are earning below 200 USD, start with 20 USD into the stock market (if they require say 100 minimum, partner with other 5 people and target one company) keep it up and prepare yourself for what do when the value has grown.

    1. Congratulations. You should share how you manged to fund yourself. This is one thing I have wanted to do and provide practical examples that inspire people. It is true that the ZSE is a bargain right now especially for those counters with underlying value and good management.

  2. I believe investing in the stock market is 2Dimensional in that you can buy until you have a large enough share holding to get onto the board of directors or simply to gain value. Also by observing the current situation in Zimbabwe, the elephants are not in the pool and history has it the elephants will definitely comeback into the pool.

    1. So true. Many takeovers have actually happened by a syndicate buying slowly and increasing their stake in a certain counter. Witness the takeover of First Mutual by ReNaissance as well as the way they took over as major shareholders in RTG Group. Because of that Patterson Timba now sits on the RTG Board as Board Chair.

  3. Genesis 11 vs 6: The LORD said, “If as one people speaking the same language they have begun to do this, then NOTHING they PLAN to do will be impossible for them”. You need to have a plan (i.e board takeover) or (flip the shares), and working with a team/partners/friends you can achieve more.

    I know the ZSE is a bargain right now by way of example one month ago we purchased Pioneer transport at 0.05c and now its trading at 0.17c which is a 340% positive increase (Please NOTE this worked for me and may not work for you). TA for example under Shingi Mutasa has the Mwasara investment initiative which i think will cause some shares to shoot through the roof. Honestly were else in the world can someone get shares for less than 1c USD. However as you indicated in your comments you need a long time outlook to be able to ride the waves (highs and lows).

    On the issue of how I managed to grow money for my fees: – I used a stock broker who was efficient, I traded whenever it was possible and I used OPM (other peoples money) and OPT (other Peoples time). The shares we traded then varied but I remember CFX moved by 500% in four days and we sold everything. Stock brokers can actually sell and buy for you in both morning and afternoon trade and you can avoid charges by asking them to sell and keep the money and then buy another share.

    1. Dear Taffi,

      Am proud of you. One thing that comes out of this is that one needs a good working relationship with his stock broker. This allows for efficiency and good wealth creation. For example at the height of the hyperinflation in Zim, I used to order the purchase of the certain counter and then pay after seven days when others were required to pay upfront. Zim then worked on a T+7 day payment cycle. Sometimes by the time I paid for the shares they had already gained value. It still happens. Like my pastor says — life is built around relationships.

  4. I have been following the above conversation, and it really made sense to me. I seem to have been avoiding to make such an investment but really feel i should invest. Which counters can i start looking at and how best should I mange this, I am a young man and my belief is to invest long term as well as short term. How best can i get more insight of the stock market.

  5. Dear vfconq

    I am not sure what Dr Makoni would suggest but here are my thoughts. Firstly investment is a PLAN hence you need a vehicle(s). Now each vehicle has it’s adv and disadv be it real estate, stocks, business or commodities. For example if I want to get to Mutare from Harare, a. I can walk (abt 260 days at abt 10km/day) b. I can jog/run ( that about 130 days) c. I can ride a bike (abt 60 days) d. I can swim there (possibly) e. I can drive there in a Mazda 323 or a Ferrari 360 turbo. The point is that I will get there but at different times.

    Secondly you then select the investment vehicle that will get vfconq to the destination at your require and at the speed you are comfortable with. For example you need to be in Mutare for a meeting in two hours you can use a plane or the Ferrari. But if you can afford to get there in 6 months time you might as well walk and enjoy the scenery.

    Thirdly remember that the vehicle you use has different cost (levels of risk relative to your understanding of the business princples governing that area).

    For example when I was earning 50USD in 2007 I decided to buy shares using 10 USD. When I did my first trade I learnt alot ( you learn faster when your own money is on the line) I enjoyed so much I noticed I need more cash to put into the market. I think because I was thnking about wealth then I began to notice more opportunities. I would look for orders then forfill them ( Bon Marche Avondale wanted chickens and because I had done my attachment in chegutu I knew I could get them at a cheaper prise, so I headed to chegutu and made the deal- forfilled the order and got paid. ) my plan was to pay for my education overseas and I needed 32 000 USD of which 15 000 was needed before I left Zim plus airfares,accommodation and transport. So with the Zim$ I moved them to the stock market and would only exit to buy USD.

    Make a plan and stick to it.

    For example my plan is to buy 2 house in Australia by 2013 August and I am going to us a business to get there and my current Job to secure the initial loan.

  6. thanks drtaffie, thats is sound solid foundation advice, i will definitely have to sit down and make a solid plan, i have interest in real estate as well especially on the long term, and i want to put some money out there for investment as i have been saving from my job. I dont believe in $ just sitting, I have saved $2000 so far, what will be your take on the first move I can make.

    1. I think Taffi has a handle on this. Choice of counters is best done with advice from a stock broker after he understands your risk profile and your plan. I recommend that you get your plan in line with what Taffie said and then approach a stock broker to discuss your options. Remember the broker is an advisor but the final choice is yours. I definitely recommend that you invest your current savings and continue investing consistently. At times you may need to trade the shares depending on its performance. Stock investments can be a good way to enter the real estate market after you have build a portfolio.

    2. I think :

      1. Who do you associate with? (you are the sum average of the 5 people you hang out with) you may need to stop association, have limited association and increase association. ( My experience is that I stopped associating with my friends from uni and had limited association with some friends and family and increased association with my mentors. I was 24 two years ago but I managed to get the following people to be my menoters (Paster Tom, Dr Matthew Wazara, Dr Andrew Reid, Dr Magumise, Dr Chinhara, Dr Alex Danso, Brother Jeff Mzwimbi, Brother Richfield Zinyemba, Sister Snyx, Farazi Rowdzi and Shingi Munyeza) However I must say it cost me time and money, because I would invite them to lunch and ask them a million questions and because of their generosity, information wise I grew MYSELF first. One thing they all said was I should work the principles (if i want to get muscle , no one can go into the gym for me. I have to get in the gym and work that machine). The next thing they told me was to do an hour of power (20 minutes of prayer, 20 minutes of exercise and 20 minutes of reading a good book.)

      2. With 2000 I suggest you put 200 aside and invest in yourself. I would recommend you buy a book titled Success Principles by Jack Canfield. (Let me tell you a bit about my experience: In 2007 I met Brother Jeff who was conducting the success principle workshop at church (celebration ministries) it cost 50 USD but from then I moved from earning 50USD a month to getting paid 50 USD an hour I moved from being a research assistant at Pari to Starting a consultancy and working between Harare, J’bourg and Kenya. I moved from having a passport to using it, i traveled by air to over 12 different countries. The information help me as evidenced above.

      3. You need to change yourself via changing the things you say to yourself, the things your see and the thoughts you think about. I am not talking about things which I did not do myself, I did this and it worked. Take Dr Makoni for lunch and ask him about the stock market, ask him about his stock broker, what type of questions you should ask a stock broker, how to select someone who wants to help instead of a salesman. What stocks he is invested in and why? how do you analyse a trend? what a PE ratio, how do you get information from a listed company, check the prospectus e.t.c

      4. Then put some money into the market only after having done your due diligence. Remember the stock broker works for you and before you select on interview alot.

      5. Find out about IPO there are usually very good initial investment.

      1. 1 think I can say is I will not regret such powerful information you are giving to me, all that is left is its up to me using it or not, in this case i will definitely use this infor. Dr Makoni, i will have to call you for lunch. drtaffie i am truly grateful for the effort you are putting in this. I have hunger to invest and my target is to be the 1st investor in the family and pave the way for generations to come. I believe a man should not have 1 source of income (the job), even in the Bible we see many examples of the great man like Joseph, David, Solomon, they all had gold, silver, palaces, livestock, farming as their sources of income and that is what Gods wants for us (different sources of income). And what you guys are doing is great mentoring as well which most of these men in the Bible went through via their fathers and most of all our Heavely father. Thanks guys

  7. Drtaffie you have just enlightened me.l like what your mentors told you about the hour of power.l like it when you say “you need to change yourself by changing the things you say to yourself”.These are powerful words.l like your line of thought,so inspirational.l see now l have to invite Dr Makoni to lunch.He is such a wonderful mentor.

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