By Admire Maparadza Dube
Stock markets have, for long, been viewed as those hallowed places where people in suits interact on financial terms for some economic benefit to themselves, their companies or to nations. Whatever these well-healed individuals in designer wear participate in while on those consecrated grounds, virtual or otherwise, those outside have taken it to be exclusive engagements for an anointed few.
To be fair, those within the inner sanctum of these finance markets have, inadvertently or by design, helped perpetuate the myth. We communicate occurrences in those celestial grounds using so much technical financial jargon to a point where we may as well have invented a whole new language altogether.
“The bullish market has encouraged investors to go long, increasing their exposure as they ride the trend. The instruments demand has widened the spread and some bids are expiring at close before execution. The bubble has exponentially increased market capitalisation of most listed counters as share prices have been in the green for days now.”
This certainly is not ordinary English language. The majority of us can understand the individual words constituting these sentences, but how many can make sense of it?
For the record, what is being said there is: “Prices of company shares being sold on this stock exchange are increasing. Investors have been buying more and more shares at current prices, hoping to make a profit later when they sell at an anticipated higher price.
This demand for shares has made the stock exchange increase its commissions. Some traders are failing to buy shares by the time the exchange closes, with more buyers than sellers on the market.
Companies selling shares have increased their capital value as their individual share prices have for days been increasing.
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One apparent reason, as shown above, for use of those terms is to summarise descriptions, not to confuse the general public as some believe. Adoption of these expressions increases efficiency as investors have to crunch large volumes of data to make their decisions. With that in mind, the very starting point for understanding stock markets is grasping the field vocabulary and nuances.
It is, however, high time everyone participated in these markets as finance is a big part of everyone’s life. Harnessing the benefits of investing in the stock markets should really be a priority for anyone earning an income, owning anything of financial value or seeking a financially secure future.
Stock markets are part of the capital markets, which refer to venues (physical and virtual) where savings and investments are channelled between the suppliers who have capital (savings) and those who are in need of capital (money).
These venues may include the stock market, the bond market, and the currency and foreign exchange markets.
The stock market allows investors and financial institutions to trade stocks, either publicly or privately. Stocks are financial instruments (assets that can be traded and these assets can be cash or a contractual right to deliver or receive cash or evidence of one’s ownership of an entity that represent partial ownership of a company and the like).
These assets are used extensively by companies as a means of raising capital when they sell portions of their equity (ownership) through this “equities market.”
I reckon this is such a critical field for any career path that it should actually be taught at primary school level even if one ends up as an engineer, medical doctor or social worker. Current school curricular nurture graduates that are ready for employment.
I am by no means saying being employed is wrong. On the contrary, I am decrying churning out graduates who have little technical knowledge of running their financial affairs from the very salaries they earn. Moreso, if those same individuals manage to spare enough savings, are they financially equipped to know the various alternatives available to them?
When anyone has spare savings, they should be aware of the “costs” of keeping their money in a bank account.
They could even be weighing the possibility of opening a business with that money, which is not wrong. But, they equally ought to be alive to the option that it may be less risky, less involving, more efficient, more rewarding, among others, to buy tradable instruments on the stock market, harnessing the benefits of investing in the stocks.
The benefits do not end there.
Buying shares is one of the best ways to stay ahead of inflation. Historically, stocks have averaged an annualised return higher than inflation in most exchanges for their best performing counters. It does mean, however, that you must have a longer time horizon for your investment. That way, you can buy and hold even if the value temporarily drops.
Zimbabwe is a great case in point with the nation beset by a myriad of economic challenges and in 2008 its annual inflation, by some measures, peaked at an unfathomable 79,6 billion percent yet when businesses squealed, the Zimbabwe Stock Exchange outperformed inflation. Even to this day in 2020, ZSE was the best performing exchange in Africa and beyond in real terms (inflation adjusted).
It is easier to buy shares than to start a business with little barriers to entry. One can purchase them through a broker, a financial planner, or including online in minutes and the commissions are single digit percentages with most inclusive of taxes as well.
Equally, it is easy to sell shares (that it is to sell or wind down a business). The stock market allows you to sell your stock at any time.
Economists use the term “liquid” to mean you can turn your shares into cash quickly and with low transaction costs. It is prudent to note most sudden needs for cash may make the investor run the risk of being forced to take a loss since prices are volatile.
In that quick need for cash therein lies a benefit one may harness while holding on to shares. Some institutions treat them as assets, therefore, can be used as collateral for loan borrowing or other financial transactions. Their valuation is almost instant and very agreeable than it is to value and agree on the value of a business. The shares themselves financially reward the investor in two ways. Firstly, most investors intend to buy low and then sell high, making a profit in the process. Or buying shares at a high price and selling at low prices, making a profit through what is called short selling (where an investor borrows a security and sells it on the open market, planning to buy it back later for less money.
Short sellers bet on, and profit from a drop in a security’s price. But this is a whole other topic on its own.) This means they maintain their monetory value in real terms and also make a profit from trading shares on the stock exchange.
The second way the stock exchange rewards an investor is through dividends. This is where holders of shares in a well-established company being run by professionals and making a profit occasionally “shares” those profits with its “share”-holders in what are called dividend payouts. Thus the investor maintains the value of their share as an asset and also benefits from regular profit sharing from the company where they hold shares without deducting from their share values.
For the Zimbabwean players, the stock exchange has thus served as a refuge of sorts, protecting the investor class from surging inflation, thus maintaining value of wealth for those who participate. Yet also, it manages to give positive yields in an environment otherwise more challenging for small business players.
True, stock exchanges are not the only option for individual investors to financially secure their fututre, nor are they so far fully up to the task. Yet with the right education and incentives, nations can encourage the growth of their stock exchanges to become important vehicles for local companies to raise capital for business expansion while simultaneously empowering individuals to vary their financial portfolios, spread risk and increase income-earning capacities.
This positively feeds into the finance ecosystem as those very companies have effective demand. Capital markets should not be hallowed grounds for a select few. Non-economists also can harness the benefits of investing in stocks.
It is of paramount importance, however, to equip oneself with necessary knowhow, or engage one who does, before diving head first into stocks trading as there is a real risk, like in any business venture, of losing all your money.
- Admire Maparadza Dube is a financial analyst and banker. He writes here in his personal capacity.
