A stock is a share in the ownership of a company, plain and simple. In other words, you own part of the company and you share the profits it reaps. The more stocks you possess, the more stake you have in the company. Whether it’s called shares, stocks or equities, they all mean the same thing.
Stocks, like normal goods and commodities, require a location or facility for transactions to take place. This “marketplace” where stocks are traded is, unsurprisingly, known as the stock market, or stock exchange.
The main purpose of the stock market is to facilitate secure and efficient exchanges of stocks and derivatives between buyers and sellers. Now imagine a world without a marketplace. Trying to exchange a pig for some flour would probably involve a painful process of searching a willing seller. Therefore, the stock market, run by brokers and traders, ensures that stocks are sold and bought more efficiently.
Every major and well-developed country would have a stock market. Some of the world’s busiest stock markets include New York Stock Exchange (NYSE), Toyko Stock Exchange (TSE), and our very own Singapore Exchange (SGX).
As mentioned earlier, an investor’s profit comes from the difference of a stock’s selling and buying price. So what exactly affect a stock’s price in the market? The mechanism of demand and supply, of course. When more people want to buy a particular stock, its price will rise. The opposite happens when more people will like to sell a stock. Stock prices fluctuate every day.
This simple economic concept may sound easy to comprehend, but understanding the reasons behind people’s behaviours can be a difficult task, That said, the principal theory is that the price movement of a stock indicates what investors feel a company is worth – or the value of a company – not by the given stock price. This perceived value could be altered by a company’s profits or earnings, or a country’s political stability, among others.
- Stocks trading provides potentially higher rates of return
- Applicable for both long term and short term investments
- Short term stocks trading can be highly lucrative with the right skills and knowledge, while long tern investments almost always guarantee appreciation in value, hence eroding away inflation
- Hugh variety of stock markets and companies equal more selections and informed choices
- Flexibility in starting capital, be it $1,000 or $1,000,000
- Ownership of a listed company gives dividends, or periodic “sharing” of the company’s profits
- Ability to rightfully and legally make your views known to a company’s board of directors
- Bragging rights
A share represents a part-ownership of a company. For example, if you buy 10,000 shares in a company that has issued one million shares, you own one percent of that company.
The most common type of shares are ordinary shares. Other types of securities include: preference shares, warrants, bonds, debentures and loanstocks.
What are ordinary shares?
Holders of ordinary shares have the right to share in the profits of the company after preference share holders have been paid their dividends. Holders of ordinary shares are paid dividends that vary according to the profitability of the company and the recommendation of the company’s directors. Should a company be wound up, its ordinary shareholders will receive a payout only after all other creditors, including unsecured creditors, have been paid.
A scrip is a certificate representing shares.
What are scripless shares?
A: Scripless shares are shares which are held in a securities account. In Singapore, physical shares are deposited in The Central Depository (Pte) Ltd (CDP). The CDP records all scripless share transactions electronically and debits or credits shares to your personal CDP Securities Account with each share transaction you make.
Why scripless trading?
A: With the increasing volume traded on stock markets, it becomes more difficult to keep up with transactions using traditional methods of delivering physical shares to buyers. Computerised transfer of shares in many markets, including Singapore, means transactions are recorded accurately and almost instantaneously. Share owners no longer have to hold physical shares to prove ownership.
When you place your order to buy or sell, it is directed immediately to our screen-based trade matching system. If there is another order that matches your asking or selling price, the trade will be executed immediately. Otherwise, it will join a queue of unmatched orders which are lined up according to price and time priority. At the end of each trading day, all unmatched orders will lapse and you will have to enter your unfulfilled order on the next trading day.
Another way to acquire shares is by subscribing for issues from newly listed companies, also known as Initial Public Offerings (IPOs).
You can pick up information about such IPOs through press coverage or advertisements by these companies. They usually provide details like the IPO price and issue manager.
IPO prospectuses can be retrieved from the companies’, SGX and MAS websites. Hard-copies can be obtained from the issue managers. They contain important details like the type of business they are in, future developments, their risk factors, business performance and credentials of the management. You should read the prospectus carefully before you subscribe for the IPO.
To apply for an IPO, you may do so via an ATM or a manual submission. For manual submissions, obtain a subscription form from the company’s share registrar, complete and send it in with a cashier’s order.
If you are using your CPF funds to apply, open a CPF Investment Account with an approved bank and make your application through that bank or via its ATM.
Daily share prices in the stock market are determined by market forces of supply and demand. In the long term, share prices are influenced by economic and political events, both at home and abroad.
Can I tell my broker at which price I want to sell or buy shares?
Yes, but because the price of shares depends on market forces of supply and demand, there may not be a market at the price you want to buy or sell.
For example, should you place a buy order for share X at $2 when the best bid (buy price) for that share is $2.20, you are unlikely to find a seller who will sell at your price.
Conversely, should you want to sell share Y at $3.50 when the best ask (sell price) is $2.80, you are unlikely to find a buyer who will buy at your price.
What happens if I want to sell shares and nobody wants to buy them?
If the trading system cannot find an immediate match for your order, that order will be automatically stored in the computerised trading system until a buyer and a seller can be found. For example, should you make an order to sell share X at $2, it would be matched against an order to buy share X at $2. If there is no order to match the price, the order is added to the list of other buy and sell orders, which are held according to a price, and time, priority system. This system ensures that orders which offer the most attractive price are processed first. If two orders offer the same price, the order placed first will take priority. However, all unmatched orders will expire at the end of the trading day.
Shares are mostly traded in board lots of 1,000 shares on the SGX-ST.