How did the stock market come into being?

It must be understood that most big businesses started up small family enterprises and in a course of time, they grew into financial giants.

The profits of companies like Wal-Mart, Dell Computer and McDonald run into billions of dollars every year. But how many of us know that Wal-Mart started only as a single store business in Arkansas. Dell computers were sold by their maker Michael Dell from his college dormitory. McDonald started up as a small restaurant. All these businesses, starting as non-descript personal enterprises and have blossomed up into largest businesses in the United States.

The secret of their growth lies in the fact that they sold their stock to raise the capital for expansion.

It hardly needs to be mentioned that the companies need money for their expansion program. One way to get the capital is to borrow it from the banks or the venture capitalists. The other way is to sell a part of their business to the general public and use it to fund their growth programs. Since banks or venture capitalists cannot be easily convinced about the profitability of the company, they take the second route of going public.

In order to go public, a company has to get its financial credentials verified by a firm of underwriters such as Goldman Sachs or JP Morgan. The underwriters ensure that the company will grow by going public. The proprietors of the company who own 100% of the business decide to give up with certain part of the business ownership which is sufficient to raise the amount required for their expansion plan.

Let us suppose the company wishes to keep 60% of the company and sells the remaining 40% to the public as stock through the underwriters. This kind of first time sale of company's stock is called Initial Public Offering. Since the owners own a majority of the stock, they retain their control over the business.

The market where the IPO is issued and sold is called primary market. Once the shares of a company's stock are purchased by the public, they become its shareholders.

A share represents an investor's ownership of a company, which entitles him to share its assets, profits and losses. It is created when a business cuts itself into pieces and sells them to investors in exchange for cash.

A few days after the company's stock is subscribed, it lists itself on the stock exchange where the shares purchased by the general public are bought and sold daily.

The shares of the company are 'auctioned' daily at the stock exchange also called the secondary market.

What is a stock exchange and why is it needed?

You are a big company and you want to sell your stock shares. You put up an advertisement in the newspapers and get the customers. Since you are a big company, you can afford to bear the advertisement expenses.

If you are a small company, you can sell it by word of mouth.

In both the cases, you do not have to sell on the daily basis.

This is what happens with a retail share trader. If you buy, say, five shares of a company, it would not be financially viable to pay for advertising their sale. They are not likely to be sold through the word of mouth in view of the limited scope of this practice. Moreover, you cannot buy and sell your shares on the daily basis using this approach. Your investment in the stock of a big company, therefore, becomes a meaningless exercise.

That is why stock exchanges were set up.

A stock exchange facilitates the trading of shares bought from the companies. When a company sells its shares through its IPO, it is called primary market. But when the investors in the company's stock want to trade their shares, they have to do so in another kind of market. It is called secondary market. A stock exchange provides secondary market to the share traders. The New York Stock Exchange-NYSE--- is an example of such a stock exchange.

A stock exchange is like your neighborhood supermarket that sells all types of food items. The sellers of food items also come there. It is a one stop shop where every body goes to buy different types of food because it is more convenient.

So the NYSE is a supermarket of stocks where every body can buy and sell the stock shares.

When to buy and sell at the stock market

The factors that are responsible for price movement in the capital market and we can say that the topic is open ended, meaning that relevant points could not have been exhausted. We also examined the reasons behind the new Nigerian Stock Exchange rule to the effect that the price of a stock could not move at the end of the days trading if and when the volume traded is less than 100,000 units of that stock. By now, we have learnt one or two things about the capital market to warrant the discussion of appropriate time to buy or sell stocks in the secondary market.

There is need for us to appreciate the fact that trading takes place on the floor of the Nigerian Stock Exchange on daily basis except on public holidays and billions of Naira change hands with several thousands of deals. Every investor should be familiar with the contents of daily official list produced by the NSE for the information and education of stake holders. Therefore, buying and selling is a daily affairs and experience has shown that investors are usually not patient enough as they always want their deals to be executed soon after they have lodged money with their brokers. It is also important to note that, by this singular act of impatience, investors could lose money when the timing of the deal is not right. At the same time, undue delay should be avoided by all means.
The best time to buy or sell stocks is when your Stock Broker advises you to do so or considers the best time for you to take position or offload. This assertion is based purely on an assumption that the stock broker concerned is one who is very articulate and current and constant in stock dealing and not just an agent. A broking firm with a research department would under, normal circumstances, be better than some others who perhaps are up starting. Brokers are technical analysts who should be able to predict the market with reasonable accuracy.

It could be amusing if you are told that the best time to buy stock is when you have money but it is the truth. If in the first instance, you don’t have money, then you have no business in buying stock. Therefore, you must plan your finances such that savings for stock market investment is given the desired priority applying the principle of making your money work for you. This same principle of buying when you have money apply to selling which some of the times occur when an investor is in need of money either for personal use or for diversification of investments.

Let us go a little technical by saying that the best time to buy stocks is when you have assurances of maximizing your returns with minimal risks. Investment is all about risks and returns which must be calculated and measured. When you are sure that the risk is minimal and the returns reasonable, you can buy. On the other hand, anytime an investor is comfortable with the level of appreciation in his stock and the likelihood of further major upward movement is not certain, it is time to sell as a result of capital appreciation.
It is also important to know that to generate the desired income, the best policy is to buy low and sell high. However, in portfolio management, you can adopt the strategy of reducing your average cost by buying more of the same shares you bought high in past deals. A highly knowledgeable investor can decide to sell at a loss and apply proceeds to position for a growth stock.

What is the relevance of bonus and dividend on the timing of buy and sell? It has been elucidated in this column that money making in the capital market comes through dividend payment, bonus issues and capital appreciation. Therefore, when a company declares dividend, which is attractive enough in the opinion of brokers, the price of the stock is likely to move up and investors could decide to either buy to take advantage of the dividend (cum div.) while others would decide to sell having derived satisfaction from capital appreciation. Bonus issue is always seen as a sweetener that generates a lot of interest in the market. The fact that the volume of shares held would increase by the bonus and the price of the stock could eventually rise even after adjustment for bonus and dividend, call for time to buy or sell depending on which decision favors the investor.
For all first timers or new investors, there is need to rely on your broker to select stocks which prices have come down reasonably and that are likely to rise in the very near future. If your capital outlay is small, it is advisable to buy low and wait for your stock to grow.

In conclusion, we need to emphasize that there are no fast rules for buying and selling other than to study the market and ensure that your decision is one that will fetch you money. For example, the financial year end of companies and their quarterly reports are very relevant to the timing of buying and selling. Expectation of good year end results could lead to increase in the number of deals in a stock when decisions are taken either to buy or sell. Some other investors follow the market to buy or sell when others are doing the same or based on hearsay sometimes.

Gostan Goods
fendasite@yahoo.com

i will support your write up about stock market. But the readers will still more research on their own before starting the venture.

Market capitalization also referred to as a market cap, is the total value of the firm's outstanding shares. The investor uses a market cap to determine company size and value. Market capitalization is determined by multiplying the market price of a share by the number of outstanding shares. From this value, investors analyze the company’s worth in an open market. According to demand and supply, stock prices are determined by investors i.e., the public; therefore, the market cap is the public’s perceived value of the particular company.