You probably hear stock market terms getting thrown around all the time, especially at the boring back-end part of the nightly news. All Ords, Dow Jones, Greenback and GDP growth go in one ear and out the other, along with scattered flurries, low-pressure systems and ex-tropical cyclones – we’ve heard these terms every day for as long as we can remember, but do we know what they mean? Do we even care?
Well, hang around for 3 minutes as I give you a quick rundown (on the share market side) and you’ll have a better understanding than 99% of the population.
What is meant by shares in the share market?
So many people have heard about the share market, but have never really bothered to learn about it because it seems all too hard. And, either way, shares are very risky….. aren’t they?
Well, yes, shares can be risky but, funnily enough, everyone is completely comfortable borrowing hundreds of thousands of dollars from a bank and sinking it into an investment property which, by the way, is arguably no less risky.
The difference? A property is tangible and shares are not; hence the perceived greater risk of shares.
So, in order to raise some awareness and understanding on these risky investments we call shares, I’m going to do my best to liken the characteristics of shares to our country’s love affair with rental properties.
Let’s first begin with some basics.
What is the difference between stocks and shares?
Nothing. The terminology is used interchangeably. I find that Americans use the term ‘stocks’ more, but at the end of the day, stocks and shares mean the same thing.
How can I relate this to property? Think of the terms ‘investment property’ and ‘rental property’. Same thing, right? Just like ‘shares’ and ‘stocks’.
What are shares on the stock market?
A share is ownership in a company. Every company has shares. Some companies are private (you might even run a private company or know someone who does) and some are public. A publicly listed company is simply a company traded on a stock-exchange so people (anyone) can trade shares in that company easily.
Each company divides its ownership into a certain number of share parcels – usually in the billions for a large publicly listed company (blue-chip company) – and those shares are owned by millions of people. For example, ‘Company A’ might have 3 billion shares, at a current share price of $25 per share, which would value the company at $75 billion. The price of each share in a company is determined by one person’s willingness to buy a share at a certain price and another’s to sell their share.
Each company is ultimately managed by a Chief Executive Officer (CEO). A CEOs legal responsibility is to maximise returns for shareholders.
How can I relate this to property? Think of a company as a block of beach-side units with 20 units in the block – each with a different owner. There is one block of units (i.e. the company), but 20 people each have a share in that block of units. Each person receives an investment return in the form of rent (similar to a share dividend) and potential capital growth if the block of units increases in value due to demand, similar to shareholders if the value in the company increases.
How to understand the share market
There are around 60 major stock markets (stock exchanges) around the world. Each of these exchanges has thousands of companies listed on them. The purpose of the exchange is purely to provide a platform for the shares to be easily traded, like a marketplace.
It’s as simple as that! This is what’s meant by shares in the stock market.
How can I relate this to property? Think of one stock-exchange as the suburb you live in. Your suburb has thousands of houses in it, just like a stock exchange has thousands of companies on it. Houses are owned by the public and bought and sold through a real estate agent. The real estate agent is the equivalent to the stock-exchange, in that they create the environment that brings the buyer and the seller together. The price of each house is determined by the supply and demand of one person’s willingness to buy a house at a certain price and another’s to sell their house, just like shares in a company.
How to make money on stocks and shares
There are a variety of ways to earn money through the share market. The traditional and most common way is to buy shares in a company or companies that you believe will be profitable and then (hopefully) receive a return in the form of capital growth and/or dividends.
Capital growth refers to the value of your shares increasing. For example, if you bought shares in ‘Company A’ at $25 per share and supply and demand has driven that price up to $27 per share, then you have had capital growth of $2 per share. If you owned 1,000 shares, your capital growth would be $2,000. However, there is always the possibility that share prices will go down if the future prospects of ‘Company A’ are not favourably looked upon by the public.
The public’s perception of the future prospects of a company may be influenced by a variety of factors including the internal management or direction the company is headed, demand for the company’s product/service or external influences such as, interest rates, legislation or an individual’s ability to borrow money.
Dividends refer to profits paid by the management of the company to shareholders. You see, when a company makes profits, they have the option to retain the profits and re-invest back into the company or pay out the profits to shareholders in the form of dividends. Most companies opt for a combination of both – reinvest some profits and pay out some profits as dividends.
That’s how you earn and make money on stocks and shares.
How can I relate this to property? Think of capital growth as your investment property increasing in value due to demand for housing in your suburb, but also consider that the value of your house may fall too due to specific issues, such as poor pest or structural reports, bad neighbours, or from external influences such interest rate movements and those noted above. Dividends can be compared to rental income. Rental income can be used to make improvements on the property, cover council bills and management costs, or it might be paid to the owner of the property as a rental income return, just like a dividend. More often than not it will be used for both.
Should I Buy Shares?
So, now that you have a basic understanding of shares and what is meant by the stock market, should you be buying shares?
The article you are currently reading is Part 1 of a 3-part series. In Part 2 (click here) I explain to you the simplest way to determine whether you should buy shares. Everyone’s situation is different, so Part 2 allows you to figure out whether it is better to be buying shares, saving, paying off your credit card, or paying more off your mortgage. Part 3 then shows you how to start buying and selling shares on the stock exchange.
Where is the stock market?
There are stock markets all over the world, from New York, to Sydney, to London, to Paris, to Tokyo, the list goes on.
The worlds biggest stock exchange by market capitalisation (dollar value) are as follows:
Exchange,Economy,Market Cap (USD bn),Headquarters
New York Stock Exchange,USA,$19.2b,New York
London Stock Exchange,UK/Italy,$6.1b,London
Japan Exchange Group,Japan,$4.5b,Tokyo
Shanghai Stock Exchange,China,4.0b,Shanghai
Hong Kong Stock Exchange,Hong Kong,$3.3b,Hong Kong
Euronext,European Union,$3.3b,Amsterdam Brussels Lisbon London Paris
Shenzen Stock Exchange,China,$2.3b,Shenzen
Bombay Stock Exchange,India,$1.7b,Mumbai
National Stock Exchange of India,India,$1.6b,Mumbai
SIX Swiss Exchange,Switzerland,$1.5b,Zurich
Australian Securities Exchange,Australia,$1.3b,Sydney
Korea Exchange,South Korea,$1.3b,Seoul
OMX Nordic Exchange,Northern Europe Armenia,$1.2b,Stockholm
JSE Limited,South Africa,$1b,Johannesburg
BME Spanish Exchanges,Spain,$0.9b,Madrid
Taiwan Stock Exchange,Taiwan,0.9b,Taipei
BM&F Bovespa,Brazil,$0.8b,Säo Paulo
What is the ‘All Ords’?
The All Ordinaries (All Ords) is an index that represents around the top 500 companies by market capitalisation listed on the Australian stock exchange. So when you hear that the All Ords is up 1% today, it means that, as a whole, the top 500 companies increased in value by 1% due to people willing to pay higher prices for shares in the companies, presumably because they feel the outlook for profits to be generated from those companies is positive. It doesn’t mean all shares went up in value, but as a wholly weighted index they did. The All Ords is a ‘weighted’ index, which means companies with higher value have more influence on the movement of the index.
What is the Dow Jones?
The Dow Jones Industrial Average is an index that represents the average movement of 30 large US companies based on share price, not market capitalisation. So, if the Dow is down for the day, it means that the average price/value of these 30 companies as weighted by share price has reduced.
What is the Greenback?
This is simply reference to the US dollar. It is often the benchmark for currencies around the world.