Farmville at the Stock Exchange
On the Stock Exchange, the bulls and bears are in a constant struggle. If you haven’t heard of these terms already, you undoubtedly will as you begin to invest. Lets demystify these animals.
The Bulls A bull market is when everything in the economy is great, people are finding jobs, gross domestic product (GDP) is growing, and stocks are rising. Things are just plain rosy! Picking stocks during a bull market is easier because everything is going up. Bull markets cannot last forever though, and sometimes they can lead to dangerous situations if stocks become overvalued. If a person is optimistic and believes that stocks will go up, he or she is called a “bull” and is said to have a “bullish outlook”.
The Bears A bear market is when the economy is bad, recession is looming and stock prices are falling. Bear markets make it tough for investors to pick profitable stocks. One solution to this is to make money when stocks are falling using a technique called short selling. Another strategy is to wait on the sidelines until you feel that the bear market is nearing its end, only starting to buy in anticipation of a bull market. If a person is pessimistic, believing that stocks are going to drop, he or she is called a “bear” and said to have a “bearish outlook”.
The Chickens Chickens are afraid to lose anything. Their fear overrides their need to make profits and so they turn only to money-market securities or get out of the markets entirely. While it’s true that you should never invest in something over which you lose sleep, you are also guaranteed never to see any return if you avoid the market completely and never take any risk. The Pigs Pigs are high-risk investors looking for the one big score in a short period of time. Pigs buy on hot tips and invest in companies without doing their due diligence. They get impatient, greedy, and emotional about their investments, and they are drawn to high-risk securities without putting in the proper time or money to learn about these investment vehicles. Professional traders love the pigs, as it’s often from their losses that the bulls and bears reap their profits.
What Type of Investor Will You Be? There are plenty of different investment styles and strategies out there. Even though the bulls and bears are constantly at odds, they can both make money with the changing cycles in the market. Even the chickens see some returns, though not a lot. The one loser in this picture is the pig. Make sure you don’t get into the market before you are ready. Be conservative and never invest in anything you do not understand.
“Bulls make money, bears make money, but pigs just get slaughtered!”
How To Buy Stocks?
There are two main ways to purchase stock:
- Using a Stockbroker The most common method to buy stocks is to use a stock broker. Brokerages (stock brokers) come in two different flavors. Full-service brokerages offer you (supposedly) expert advice and can manage your account; they also charge a lot. Discount brokerages offer little in the way of personal attention but are much cheaper. At one time, only the wealthy could afford a broker since only the expensive, full-service brokers were available. With the internet came the explosion of online discount brokers. Thanks to them nearly anybody can now afford to invest in the market. Currently Zimbabwe mostly has full service brokers. I recommend that if you choose a broker make sure you talk to a number of them and check their references. Stock brokers are supposed to be people of integrity and their word is their bond. Some friends of mine went to a broker who agreed to transaction with them and they instituted a bank transfer for a significant parcel of Old Mutual shares. This was a t the height of the hyperinflation in Zimbabwe. Because the RTGS took two days for the funds to hit the broker’s account, he changed rules and began to say the price had gone up and so the total shares purchased had differed. This was not true as initially he had indicated that he was selling them shares that they warehoused. In Stock broking these guys should have honoured their commitment anyway because the transfer was done within the expected period but greed made them change rules to benefit themselves. I normally recommend brokers who are linked to financial institutions and not small stand alone brokers.
- Brokers can be used to purchase shares during an initial public offering. This is when a new company is listed on the stock exchange. Normally most shares at this stage are discounted and are expected to gain on listing. A private placement is when you are invited by the promoters to buy a parcel of shares before the listing goes public. This is very lucrative but you have to be known by the promoters or their financial advisors.
- DRIPs & DIPs Dividend reinvestment plans (DRIPs) and direct investment plans (DIPs) are plans by which individual companies, for a minimal cost, allow shareholders to purchase stock directly from the company. Drips are a great way to invest small amounts of money at regular intervals. Dividend Reinvestment Plans (DRiPs) is a plan sponsored by companies that allow shareholders to purchase stock directly from a company with only minimal costs or commissions. E.g. script dividend. Recently a lot of companies on the ZSE were giving shareholders options to reinvest dividends rather than obtain cash payouts. If you are an investor and you are offered a DRiP I highly recommend that you take it.