#2- STOCKS

Hey friends!

Welcome back to Finance at your Fingertips. In this week's blog, we'll be talking all about STOCKS. If you'd like to unlock your inner investor, continue reading for some useful tips and tricks :)

WHAT ARE STOCKS?

A stock is simply a unit of ownership in a company. It is also known as a share or equity. The stock market is the exchange platform where investors are able to buy and sell stocks. In Jamaica, this platform is known as the Jamaica Stock Exchange (JSE).

UNDERSTANDING SUPPLY + DEMAND

If more people want to buy a stock (demand) than sell it (supply), then the price moves up. On the other hand, if more people wanted to sell a stock than buy it, there would be greater supply than demand, and the price would fall.

HOW DO STOCKS WORK?

• Companies generally issue stocks through an initial public offering, or IPO. Once a company’s stock is on the stock market, it may be bought and sold. If you decide to buy a stock, you’ll most likely buy it from another person (investor) on the stock market, instead of from the company itself. The same is true for selling stocks - you sell it to another person who wishes to purchase the stock.

• Investors try to buy stocks when the prices are relatively low, and sell them when they increase in price so that they may make a profit!

STOCKS VS. BONDS🤔

• Stocks give you partial ownership in the company, while bonds are a loan from you to the company.

• Both stocks and bonds have risks. With stocks if the company makes a loss, then the price of the share will decrease and you will make a loss. With bonds, if the company goes bankrupt, you may not get back your full principal and you will not be paid interest.

WHY DO PEOPLE BUY STOCKS?

There are actually several reasons persons may choose to invest in stocks. These include but are not limited to:

• Capital appreciation- when a stock rises in price.

• Dividend payments- the money a shareholder receives from the company in a given period.

• Company influence- Voting rights that determine certain company policies.

KEY TERMS TO NOTE

• DIVIDEND: A portion of the company's profit paid to shareholders.

• EARNINGS PER SHARE: Total profit of the company divided by the number of shares.

• UNIT PRICE: The price for one unit, or share.

• NET ASSET: The total of everything a company owns (gross assets) minus the total liabilities/debts.

• BOOK VALUE PER SHARE: How much a shareholder will receive per unit if the company closes down. (Net asset/# of shares).

• PRICE TO EARNINGS RATIO: How attractive the stock is to investors.

WARNING:

Never buy a stock simply based on a high price to earnings ratio, you should understand yourself why that price to earnings ratio is so high. For example, if company A was coming out with a new product that many shareholders think customers will love, you, on the other hand, may think that people will not like that product, and so you would not want to invest in that company.

FACTORS TO CONSIDER BEFORE INVESTING IN STOCKS

• Time Horizon- How long before you need the money that you invested, and the capital appreciation earned.

For example, Jane who is in grade 10 invests her savings in stocks. She wishes to collect her proceeds at the end of 4 years to fund her college education. She must invest in a stock that will increase in unit price during that time, so that she can make more money when she sells the stock (she would sell it for more than she bought it for).

• Dividend History- Are consistent dividends paid to shareholders?

• Price to Earnings Ratio- Do you want to invest in a company that investors find attractive, or do you want to be more conservative?

• The Amount of Money You Have to Invest- The less units you buy, the less the dividend. So, the more expensive stocks aren’t always the best.

MAIN MARKET VS. JUNIOR MARKET🤔

• MAIN MARKET: Platform for buying and selling the stocks of larger, more established companies.

• JUNIOR MARKET: Platform for buying and selling the stocks of smaller, less established companies.

STOCKS FUN FACTS!

• In order to trade stocks, you must be over 18 years old and have a brokerage account from a brokerage firm (many banks have brokerage firms - e.g. NCB Capital Market, JMMB Securities LTD.)

• Previously, trading on the stock market was manual; brokers would have to physically go to the Jamaica Stock Exchange office to buy or sell stocks on their clients' behalf. Now, stocks may be exchanged online, and cash can be sent to and from the brokerage account.

• Generally, overtime, stocks give higher returns than savings accounts. For example in 2019, the average interest rate on savings accounts was 1.65%, while, the average return on stocks was 34.2%. So, if you had invested in stocks, you would have made roughly 32.6% more than what you made if your money was in a savings account.

NOTE: STOCKS ARE RISKIER THAN SAVINGS ACCOUNTS (generally). Remember, the stocks don't have to perform well and can actually depreciate (decrease) in value!

• In Jamaica, capital appreciation/gains made from stocks are not taxed, but the interest you earn from a savings account is taxed. This means that taxes will not be removed from the additional money you earn from a stock, but it will be removed from the additional money from a savings account.

That's it for today folks! We hope you learnt a little about investing in stocks!

Be sure to check us out soon for our next installment in our Finance Fridays series!

Until then, "Let's be like Krabs, and get that bag"🤑