I recently had the pleasure of attending the 2nd Annual Botswana Stock Exchange Listings and Investment Conference. The theme this year: The BSE As a Gateway For Raising Capital. I know at this point I have already lost a couple of people. What is listing and what does it have to do with me, you may ask? Listing, in the finance world refers to a company’s shares being included in the list of stock that are officially traded on the stock market. Every country essentially has its own stock market, Botswana Stock Exchange (Botswana), Johannesburg Stock Exchange (SA), and the more popular ones; London Stock Exchange, New York Stock Exchange, etc. A stock exchange is an organised and regulated financial market where securities (bonds, notes, shares) are bought and sold at prices at prices determined by supply and demand.
The main reason for the conference, as suggested by the name is to encourage companies (Small Medium & Micro Enterprises) to list on the stock market. Mainly because through listing, companies are able to raise capital to expand and it also makes their business much more attractive. One of the panels I found interesting discussed the challenges facing African Stock Exchanges. For this a number of CEOs from different African Stock Exchanges chimed in and one thing they all agreed on was lack of education on stock markets. We can all agree that the financial literacy in Africa isn’t as high as it should be given our increasing access to the internet. Which brings me to the purpose of this article, to shed a little light on stock markets.
- What is a share?
‘The capital of a company is divided into shares and each share forms a unit of ownership of a company and is offered for sale so as to raise capital for the company.’ – Economic Times Essentially its like owning part of a company. Every time you hear that a company has gone public, know that it means that they are selling shares/part of their companies to the public. There are different types of shares; equity shares give their holders the power to share the earnings and profits of the company as well as a vote during the Annual General Meetings of the company. Whilst on the other hand preference shares only earns you dividends but no voting rights.
- What is a trade?
This is a buying and selling of a security in the financial markets. There are two ways to execute one; on the exchange floor or electronically. On the exchange floor refers to that place where people are always yelling ‘sell,sell’, basically what TV has led us to believe is Wall street. And electronic trading is what most individual investors do using an electronic platform, it is usually much more efficient and faster.
- Stock prices
First and foremost, stock prices are a function of demand and supply and if you ever did Commerce or Economics or anything related, you will know what graphs I am referring to. Earnings made by a company or the economic climate of a certain country affect the desirability of owning or selling a stock. Which then tips the supply and demand balance thus determining the stock price. It is important to note that the Efficient Market Hypothesis suggests that stock markets have perfect information i.e. whatever happens that might affect the stock prices is automatically assimilated into it. For example, if a CEO of an oil company were to step down, the stock price for that oil company will immediately reflect that change. There is still some debate as to whether this happened in the real world or not.
- What is a broker?
So who does the actual trading of these stocks/shares? Well you might have heard of brokers. A broker is an individual or firm that charges a fee or commission for executing buy and sell orders submitted by an investor. An investor tells them which shares to buy and how many and a stockbroker executes the trade either through a stock exchange or over the counter.
- Why invest in the stock market?
If you are looking for a long term investment then the stock market is one advisable way to go, especially when you are still young. Mostly because stock and stock mutual funds offer the most potential for growth, historically speaking anyway. One other important reason is that most shares offer income to investors in the form of dividends. Dividends are typically paid twice a year and can act as a source of constant cash flow. And lastly, compared to just saving your money in a fixed account for example, a company’s revenue and earnings will increase at the same pace as inflation. Thus your dividends and hence investments will not be affected by inflation.
There is obviously a lot more to the stock market that this. If it’s something of interest to you then do your research, there is a lot of free online materials that broach this subject. Let’s all work together towards a financially literate Africa!