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Stock Market Basics for Dummies (Part I)

A stock market is a form of market place for the buying and selling of stocks or shares.  Probably the next question would then be; “What is a share?” Basically, if you own a share, it means you own a portion of a company. Think of a company as a cake. As a shareholder, you own a slice of the cake. Shares are largely traded through a stock exchange that is regulated. In the case of Zimbabwe, the Zimbabwe Stock Exchange (ZSE) is the official stock exchange. It is an organized and regulated financial market where shares are bought and sold at prices governed by supply and demand. There are currently 56 active companies listed on the ZSE.  On the other hand, the Financial Securities Exchange (FINSEC) is registered by the Securities and Exchange Commission of Zimbabwe as a Securities Exchange ATP (Alternative Trading Platform). FINSEC harnesses and facilitates electronic trading of a wide variety of securities, thereby formalising marginalised market segments and bringing all alternative trading activities on to a central and organised market place. The basic idea on the stock market 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 of the profits made to shareholders. Dividends can be paid out quarterly, semiannually or annually depending on the company’s dividend policy.

Stock Market Jargon

Here are a few terms that you might have probably heard on Bloomberg, CNBC or during the stock market commentary segment of business news;

  • Current stock price – the current stock price is the actual price of stock on the market. It is actually the price of the stock from the last trade
  • Bid Price– the bid price is the best price at which the buyer is willing to transact
  • Ask Price– the ask price is the best price at which the seller is willing to sell
  • Bear market– a bear market is one in which share prices are expected to fall
  • Bull market – a market in which share prices are expected to rise
  • Stock Broker– a person who facilitates the buying and selling of stocks on the stock exchange
  • Dividend – a portion of the company’s earnings that is paid to shareholders. This is done on a quarterly or annual basis (not all companies do this of course)
  • Initial Public Offering (IPO) – an IPO is the first sale of stock by a company which has just gone public (meaning listing its shares on a public exchange for the time)
  • Order – refers to the investors’ bid to buy or sell certain amount of stock. When you want to buy or sell stock, you have to place a buy or sell order
  • Blue Chip – The name “blue chip” came about from the game of poker in which the blue chips have the highest value. Blue chip companies are known to weather downturns and operate profitably in the face of adverse economic conditions, which helps to contribute to their long record of stable and reliable growth.

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