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How the Stock Market Works

You might probably have heard words like “mania” or “craze” when reading about the markets. There has also been a lot of talk about meme stocks on the New York Stock Exchange (NYSE) and how retail investors are taking advantage of app technology and social media to band together and buy shares.  Most folks have approached Piggy and would really want to get an appreciation of how the stock market really works. The bottom line is that a stock market is where buyers and sellers of shares or stock meet to transact and effect trades. The stock market is therefore a catchall name for the overall facilitation of the buying and selling of shares of ownership in companies. On the other hand, stocks can be defined as securities or certificates representing fractional ownership of a company purchased as an investment. How much you own depends on how many shares of stock you possess versus how many shares have been issued.

A huge auction for shares

Readers may want to think of the stock market as a huge auction or flea market where people buy and sell stock.  The way it works is that owners of corporations that are looking raise capital can issue new shares of stock in their corporation.  A company or corporation can either be private or public. The main difference between the two is that stock in a private company is not traded on an organized stock exchange.  On the other side, you have people like you and me (investors and traders) who buy shares of stock in these corporations. The info-graphic below captures how it works;

There are two main reasons why one should by shares; (i) for capital gains and (ii) to earn dividends.  The stock market is all about making money. Quite simply, if you buy stock in a corporation that is doing well and making profits, then the stock you own should go up in price (the profits you make from a stock are called capital gains). Companies that also do well tend to declare dividends (profit distributions to shareholders).

Are stocks a good investment option?

There are several reasons why one should buy stocks. According to researchers, stocks have beaten every other type of investment over any 10-year period during the last 75 years. They are a good buy even after a market crash or an extended bear market. According to research conducted by Jeremy Siegel, best-selling author of Stocks for the Long Run (McGraw-Hill, 2002), over the long-term stocks gained an annualized 8% after inflation.  In the short term, stocks are riskier than fixed-income assets, but in the long run, says Siegel, stocks outperform every other investment. In addition, it is cheaper to buy stocks over the long term, especially if you buy and hold. And according to the experts, the odds are quite good that the market will continue to go up just as it has done in the past (although there are no guarantees).

How to get started

An investment in education should be the starting point in your trading and investing journey. The Securities & Exchange Commission of Zimbabwe (SECZIM) and the Investor Protection Fund (IPF) have launched the Investment 101 Handbook that provides a solid foundation for beginners. Download a Copy of the Investor 101 Handbook below;

The infographic below by The Money Making Page sums up the steps that you will need to go to become a professional investor.

Overall, the key to winning as an investor is to develop a healthy respect for risk. It is quite common for people who do not invest in the markets to consider stock trading a form of gambling.  Gambling is an act that depends solely upon chance. Successful investing relies on an investor’s ability to reason, weigh risks, spot opportunities, and make quick decisions. Neglecting to assess risks before entering any trade is a gamble.

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What is Piggy Saying? – An insights and analysis show that covers Economics and the Stock Market in Zimbabwe.