A hitchhiker’s guide to the stock market – by William Banham

For the most part, the stock market is seen to be a harsh mistress with an unforgiving track record. For someone who has never invested, or even looked at the market, establishing a basic understanding is so important, because most people are indirectly involved as it is. If you have ever held a job, your superannuation fund is more than likely to be involved whole or in part in equity-based investments, and for this reason alone, having a sound understanding is paramount.

You might have seen on the early morning news that the market has dropped so and so many points, or heard of the success story where someone turned $10,000 into $8,000,000 and retired at age 21.

Regardless of your stance, the market is a place where most of the youth in Australia tread very lightly. This report is the first of a series to help break down that barrier, which could down the track help you set yourself up financially for life.

The price of a stock is calculated purely based on supply and demand for a small percentage of a business, or ‘equity’ in that company. It is a price that is dictated by the number of buyers and sellers at any given price at a point in time. Shares, or equities, are bought and sold on the Australian Securities Exchange (ASX), which is a provider of price calculation and exchange open almost every weekday of the year between 10AM and 4PM. Essentially the ASX is a marketplace for investors to buy and sell tiny (or in some cases large) portions of companies, which are considered ‘public companies’, as they are listed party or in some cases entirely on the ASX for public purchase.

There are many factors in the modern market which affect share prices, and to better understand the nature of the market, looking at these simple terms will establish a starting point in your journey to becoming a seasoned investor.

Capital gain: is an increase in the price of a share over time. If the share goes down in price, that is called a capital loss.

Dividend: payment to shareholders by the company based on the value of the share. These payments are given at the discretion of the company, and generally are given twice a year, with ‘special dividends’ given in some circumstances.

Market Cap: Market capitalisation is a common way that businesses are valued. This is the current share price times the number of shares. In essence, Share Price x 100% of shares.

IPO: The Initial Product Offering, or IPO, is the first time that a company sells its shares to the public, to raise capital.

Blue Chip Stock: A Blue Chip stock is a general term referring to large companies that are financially established, and normally have a Market Cap in the multi-Billions. Most people agree that the ASX 50 (50 largest businesses on the ASX) are the ‘Blue Chip’ businesses, and they tend to be less effected by fluctuation and move with the market trend.

Penny Stock: ‘Penny Stocks’, also commonly referred to as a ‘speculative companies’ or ‘speccies’, are businesses that have a low share price, and thus a low market cap. These can be viewed as the opposite of bluechip stocks, which tend to generally fluctuate significantly and are seen as high-risk high return opportunities.

All Ords: The All Ordinaries or ‘All Ords’ is an index of the 500 largest businesses on the ASX in terms of Market Cap value. This index is seen as the barometer of the stock market, and is the oldest in Australia.

Bull and Bear Markets: The terms Bull and Bear markets are metaphors for the performance of the stock market at a point in time. A Bull is seen as an aggressive creature, which will rear its horns upwards to strike its opponent, which represents a market which is ‘running’ (increasing) positively. On the other hand, a Bear is a pessimistic creature, sceptical in nature and strikes in a downward direction with its claws: this implies a market which is pessimistic and downward trending.

These are some simple terms you have now learnt, which will set you up for future understanding which an investment strategy can be built from. Next week, it will get a bit more technical.

If you should have any questions, myself or any of the other associates would be happy to help.

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The information above should not be taken as financial advice. Youth Investment Group has no liability for personal financial interests or investment decisions. You should make your own investment decisions based upon your own research and what you believe is best for you.

Written by associate William Banham