The Basics of Share Trading

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Due to modern technology, stock markets are more accessible than in the past. Nowadays anyone with an Internet connection and some money to invest can get into share trading, but before doing so it’d be wise to learn some basic concepts regarding the stock market and share trading.

What are shares?

The terms “share” and “stock” are used interchangeably, but pretty much refer to the same thing.

Share Refers to a single unit of interest in a company.
Stock Refers to the total number of shares in a company.

What are the different types of shares?

Ordinary Shares

Are the most commonly traded shares and entitle the owner to a claim of a portion of the company’s profits (normally in the form of dividends*).  

In addition to this claim, ordinary shareholders can vote according to their shareholding in terms of the appointment of board members.

Preference Shares

Similar to ordinary shares, they also entail a degree of ownership and claim on profits, but normally exclude voting rights.

With Preference Shares, dividends are typically fixed and paid to preference shareholders before ordinary shareholders receive their dividends. The company can however at anytime and for whatever reason purchase these shares back from shareholders.

This is usually done at a premium, meaning that shareholders get paid more than the share is worth when bought back.

Ordinary and Preference Shares are the two main forms of stock; however, companies can customise different classes of shares in any way that they want.

*Dividend – An amount of money paid regularly by a company to its shareholders (typically paid out of profits).

How does stock trade?

Stocks normally trade on Stock Exchanges, which are platforms where buyers and sellers of stock meet to trade.

These exchanges can either be physical (such as trading floors) or virtual locations (such as online share trading platforms).

Share trading works on the basis of bids and offers. To purchase stock there must be a buyer willing to purchase stock at a certain price (bid) or a seller offering stock at specific price (offers).

Stock therefore cannot be bought at market price at any given time unless there are investors willing to sell or buy at that price (supply and demand).

What causes stock prices to change?

Stock prices change every day as a result of supply and demand. These price movements reflect what investors feel a company is worth. 

If more people want to buy a stock than sell it (demand), the price moves up. If more people want to sell a stock than buy it (supply), the price moves down. 

There are many factors that influence the supply and demand of stock, the most important of which is earnings.

If a company’s earning results are better than expected, the price increases. If a company’s results are worse than expected, the price decreases.

Earnings are just one of the various factors that affect investor sentiment when it comes to shares, so it’s important to pay close attention to news surrounding the company in question.

Positive or negative news or information regarding the company will affect the supply and demand for its stock which would directly affect its stock price.

Macro factors in the economy such as changes in GDP (Gross Domestic Product) can also impact stock prices. Share trading can therefore be very volatile and price changes can occur rapidly.

[tip title=”moneysmart tip”]When it comes to share trading it’s important to acknowledge the level of risk involved and invest accordingly. Shares present great opportunities for investment growth, but could also lead to significant losses so be sure to do your homework before you start trading.[/tip]

Stock terminology

The following terminology is commonly used when it comes to share trading and the stock market: 

Term

Definition

52 week high and low The highest and lowest prices at which a stock has traded over the last year.
Bear market A market in which share prices are falling, encouraging selling.
Bull market A market in which share prices are rising, encouraging buying.
Close Last trading price recorded for the share at market closing.
Daily high and low The highest and lowest prices at which the stock has traded throughout the day.
Dividend Per Share This indicates the annual dividend payment per share. If blank, the company does not pay out dividends.
Dividend Yield Indicates how much a company pays in dividends each year relative to its share price.
Price/Earnings Ratio The P/E Ratio indicates how much investors are willing to pay for a share and therefore measures the market’s optimism towards a company. Useful for comparing companies that operate in the same industry.
Trading Volume Shows the total number of shares traded for the day.
Ticker This is the unique alphabetic name which identifies the stock in question.

Tell us about your share trading experience in the comments below.

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For all your financial planning and consulting requirements email Raul Jorge.

 References: 

Investopedia. (2013). Stocks Basics: Different Types Of Stocks. Available: http://www.investopedia.com/university/stocks/stocks2.asp. Last accessed 7th July 2013.
Investopedia. (2013). Stocks Basics: How Stocks Trade. Available: http://www.investopedia.com/university/stocks/stocks3.asp. Last accessed 7th July 2013.
Investopedia. (2013). Stocks Basics: What Causes Stock Prices To Change?. Available: http://www.investopedia.com/university/stocks/stocks4.asp. Last accessed 7th July 2013.
Investopedia. (2013). Stocks Basics: Buying Stocks. Available: http://www.investopedia.com/university/stocks/stocks5.asp. Last accessed 7th July 2013.
Investopedia. (2013). Stocks Basics: How to Read A Stock Table/Quote. Available: http://www.investopedia.com/university/stocks/stocks6.asp. Last accessed 7th July 2013.
Wilson, T.V.. (2013). How Online Trading Works. Available: http://money.howstuffworks.com/personal-finance/online-banking/online-trading.htm. Last accessed 9th July 2013.

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About Author

Raul Jorge is a CFP® professional at PSG. He specialises in estate, investment, retirement and risk planning. Prior to joining PSG, Raul completed his BSc (Honours) in Business Administration through the University of Wales and more recently completed his Postgraduate Diploma in Financial Planning through the University of Stellenbosch.

  • David

    Which websites are good to trade from?