ONE of the first questions that comes into mind when venturing into stock market trading is, “What exactly is a share or stock?”. Here is the point, think of a company or business as a full cake.
This means that as a shareholder, you own a slice of the cake.
Basically, if you own a share, you own a portion of a company. The interesting bit is that shares are largely traded through regulated stock exchanges that are generally referred to as the stock market (a form of marketplace for the buying and selling of stocks or shares).
In the case of Zimbabwe, the official exchanges are the Zimbabwe Stock Exchange (ZSE), Victoria Falls Stock Exchange (VFEX) and the Financial Securities Exchange (FinSec).
These are organised and regulated financial markets where shares are bought and sold at prices governed by the forces of supply and demand.
Piggy believes that the basic idea of stock trading is to profit by “buying low and selling high”.
The gain that investors make when they sell high is called a capital gain. Besides capital gains, investors also earn returns in the form of dividends when companies make profits and distribute some or all the profits made to shareholders.
Dividends can be paid out quarterly, semi-annually, or annually depending on the company’s dividend policy.
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Piggy likes the stock market given that it offers a feasible option to hedge against value destruction over the long term while offering trading opportunities through short-term price swings.
Before kick-starting the stock trading game, Piggy recommends that you first state your financial objectives and know your risk-tolerance levels.
By doing this type of homework, you can determine which categories of financial assets you may want to consider investing in. Shares are generally considered risky assets given that share prices can go up and down because of several factors.
In addition, when you have considered investing in shares, there is also a need to appreciate the type of companies that you would want to invest in.
The process of analysing investment prospects includes examining groups of securities. For this task, you need information to forecast the timing and amount of future cash flows of investment candidates.
The price you pay today is based on the future income of the asset.
Figuring out what the asset will be worth in the future requires some homework and analysis. Here are a few examples of sources for this type of information:
Company annual reports often assist in forecasting the company’s future revenues and earnings;
Company websites – These provide profiles that describe a firm’s organisation, products, financial position, chief competitors and executive management;
Investing electronic magazines and websites – these provide educational articles and pertinent facts for beginning and experienced investors;
Databases provide news, market commentary, historical stock prices, economic forecasts, industry standards and competitor information;
Earnings estimates from brokers and analysts give you forecasts of a company’s future earnings;
Industry or business-sector news can frequently indicate whether an industry is in a downward cycle;
National economic data (national budgets and monetary policy statements) can point you toward a particular investment strategy. For example, if the country is going into a recession, you may want to select stocks that provide you with some defense;
News channels also offer breaking news that can help you judge whether your stock purchase is a winner or a loser;
Securities and Exchange Commission (SEC) filings provide you with financial statements from publicly traded companies;
Stock recommendations from professional analysts enable you to find out what brokers and analysts are saying about your investment selections; and
Newsgroups and social trading groups, such as those developed by Piggy are informal, online groups of individuals who share their ideas about a common interest.
Overall, social trading groups are a new trend that benefit new traders that would like to connect and receive ideas directly from trading coaches.
The objective of the trading groups would be to encourage individuals to onboard various stock trading platforms as a strategy of saving or preserving incomes.
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Matsika is the managing partner at Mark & Associates Consulting and founder of piggybankadvisor.com. — +263 78 358 4745 or [email protected]/ [email protected].
