Learning path

  • Learning Path : Phase I 0/29
    • Step 1: Investment Lesson: How Does The Stock Market Work
  • Learning Path : Phase II 0/35
    • Investment Guru: Howard Marks
  • Learning Path : Phase III 0/31
    • Book Summary : The Most Important Thing
  • Stockmarket Basics 0/4
  • Book Summaries 0/15
    • These are short summaries of the most valuable lessons taught from investing and trading books

  • Video Tutorials 0/7
    • These videos teach important topics that are relevant to the investment process and the stock market

  • Excel Video Tutorials 0/5
    • These videos demonstrate how to use Microsoft Excel to formulate basic spreadsheets, financial calculations and formulas for investment analysis

  • Stockeducate Library 0/5
    • These are the best stock market: Videos to watch, books to read, audio podcasts to listen to, and websites to explore

Step 1: Investment Lesson: How Does The Stock Market Work

What Are Shares?

For example Coca-Cola – Through its IPO (initial public offering) Coca-Cola distributed a limited amount of outstanding shares (Common Stock) of the company to the market.

Once these shares have been offered to the public, investors can either buy or sell (trade) Coca-Cola shares on domestic or global exchanges.

The share price of Coca Cola will either increase or decrease according to how the company is performing overall, and this is dependent on the underlying financial performance of Coca Cola’s business.




What Is The Share Market?

Share Market, or stock exchange, is a regulated marketplace where investors can buy and sell publicly listed companies.

There are many different stock exchanges worldwide that provide a large selection of different types of listed companies.

Australia’s stock exchange is the ‘Australian Securities Exchange’ (ASX) which provides investors with the opportunity to invest in more than 2,000 companies that differ in type, market capitalisation (market value), industry, and capital structures.

The major worldwide share markets are:

    • The Australian Market (ASX)
    • The American Market (S&P) (NASDAQ) (DOW)
    • The Chinese Market (SSEC)
    • The Japanese Market (NIKKEI)
    • The London Market (FTSE)
    • The New Zealand Market (NZX)
    • The Hong Kong Market (HSI)



What Happens When We Buy Shares?

A single share (or unit of common stock) represents a diluted portion of ownership within the company.

Purchasing shares allow the investor to become a (diluted) partial owner of the chosen company.

The Australian Securities Exchange (ASX) consists of many well known Australian companies (businesses) such as Commonwealth Bank of Australia, Telstra, and Woolworths.

If the investor decides to purchase Telstra shares, this grants them the right to become (a diluted) business owner of Telstra.

So the investor has diluted ownership of Telstra’s assets, liabilities, net profits, dividend payments, and so on.

Example: Buying Coca Cola Shares

Coca-Cola $45.15 (CODE = KO: NYSE) has 4,306,000,000 outstanding shares (as of 1st Quarter 2018)

The investor decides to purchase 1,000,000 shares in Coca-Cola the company.

This equates to purchasing 1,000,000 of Coca-Cola shares out of the available 4,306,000,000 shares.

Therefore the investor’s ownership becomes 0.00023% of the business.

= The investor owns 0.00023% of Coca Cola.



How Do Share Prices And The Stock Market Work?

The share prices for all listed companies move and fluctuate when the share market is open – which is from 10:00 am to 4:00 pm on weekdays Mon-Fri (In Australia).

Share prices move according to the volume of buy and sell orders that occur on a particular trading day.

Buy orders for shares must meet sell orders at a specified price; the price at which the last transaction occurs becomes the most recent share price for the company.

The daily movements of share prices are either random fluctuations or they can be caused by a catalyst.

Examples of catalysts include news coverage or articles about a company, announcements from the company, or institutional investors (fund managers) purchasing or selling (usually large amounts of) shares – These are catalysts that can move share prices dramatically.

    • If negative company news occurs (such as a shock downgrade to their expected net profit levels due to poor business activity) the sellers will typically outweigh the buyers because of this negative business update.
    • This is likely to increase the supply of the shares and cause a reduction in the demand for shares, forcing share prices to decrease.
    • If a positive announcement occurs (such as the company beat its net profit estimates and reported an unexpectedly large increase in net profit) the buyers will typically outweigh the sellers because of this positive business update.
    • This will cause a greater demand for shares, causing the share price to increase.



How Do You Trade (Buy And Sell) Shares?

Shares are often traded using a middle-man to facilitate both parties (such as the buyer and the seller).

The middle-man is called a ‘Stockbroker’ and their role is to provide informational research of listed companies to the client and to help advise and execute buy or sell orders for the client.

Trading shares can also be conducted individually by using online trading platforms, which cut out the middlemen (Stockbrokers).

Stockbrokers have much higher fees than trading platforms but give more assistance to clients by providing research and their opinion with the clients buying or selling desires.

Trading platforms have lower fees, limited research, and less personal assistance for clients.




What Is A Share Portfolio?

share portfolio is a term to describe an individual’s collection of different shares that they own at a certain period in time.

Example of a portfolio – The Australian Investor has:

$30,000 in ANZ – 30%

$40,000 in BHP – 40%

$30,000 in CSL – 30%

= $100,000 portfolio

Portfolios can be constructed to diversify risk by investing in companies that are different types of businesses or are in different industries, as opposed to allocating 100% of your capital to one company.





Why Buy Shares?

Studies have proven that shares are one of the best long term investments.

Historically shares have outperformed all other asset classes (property, term deposits, and bonds).

However, investing in shares is riskier than term deposits, bonds, and even property, but they have much more upside and potential rewards.

The classic mantra – the more risk you take on, the greater the potential for significantly higher returns.

Shares provide two forms of returns whether its (1) Annual income from its dividend payments which are distributed (paid) to shareholders twice a year or (2) Capital gains from share price appreciation (if profitable).

However, if share prices depreciate from the share price you paid, the company and your investment will experience a capital loss.





What Are The Benefits Of Investing In Shares?

The benefits of investing in shares include:

(1) Exposure to the highest return yielding asset class

(2) Ability to vote and have a say about how the company should be managed

(3) The right to attend the companies Annual General Meeting (AGM)

(4) Receive dividend payments that offer a consistent form of income

(5) Become a minority owner of any chosen business you wish to invest in



What Are Fund Managers?

A mutual or hedge fund is a group of professional money managers who team-up to make investment decisions when investing a (usually large) pool of money on behalf of their clients in return for a fee (commission).

They invest according to their client’s risk profile, along with their desired level of investment returns they would like to receive from the market.

Mutual and hedge funds aim to outperform the average market returns, achieve positive capital gains (profit), and sufficient income (through dividends) for their client’s overtime.

Investing in a mutual fund or a hedge fund is a good idea for individuals who want exposure to investing in the share market, but feel they don’t have the skills, ability, time, or knowledge to achieve average returns in the market by themselves.

Not all mutual and hedge funds can outperform the average market returns, so it is important to pick a funds management firm that has a proven track record of consistently outperforming the average market returns.


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