BY
NNADI JANE CHIDIOGO
2ND EDITION
COPYRIGHT © 2010 JANE NNADI C.
All rights reserved. No part of this publication may be reproduced, retrieved or transmitted in any form or by any means, without the prior permission of the author or the publisher. If you did not receive this book from Jane Nnadi or from authorized marketers/online stores, then this book is a bootleg, and you are stealing.
ISBN: 978-0-559-46329-9
Smashwords Edition, License Notes
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FORWARD
This book is a practical guide written by an investment expertise who has tested the four walls of stocks trading (both local and international). The world’s richest man today is Warren Buffet, he became that rich as a result of the level of information he has, so if you have the same information he has and when given the same opportunity, you will produce the same result and that’s why am strongly recommending the “SECRET PRACTICAL GUIDE FOR STOCKS BEGINNERS” by Nnadi Jane C. For everyone who has the dream for creating and preserving wealth. It is a guide to the lonely road of success.
Matthew Luck A (aka Don Lucky)
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CONTENTS
INTRODUCTION
CHAPTER ONE: MOTIVATION/GOAL AND GOAL SETTING
The power of the mind
Setting your financial goal
Retirement planning with the right mindset
Seven important things you should know about the rich and the poor
CHAPTERTWO: THINGS YOU NEED TO START GLOBAL STOCK TRADING
Core requirements
List of resourceful investment websites
CHAPTER THREE: WHAT IS STOCK AND THE STOCK MARKET
Definitions
Types of stocks
History of stock exchange
Stock reading
Market index
Determinants of a stock index
Types of market index
Advantage of international stock trading over local stock trading
CHAPTER FOUR: DEFINITION OF BASIC TERMS IN STOCKS
CHAPTER FIVE: THE MARKET FORCES OF DEMAND AND SUPPLY
Predicting the movement of a stock
Fundamental analysis of stocks
Technical analysis of stock
CHAPTER SIX: PRACTICAL METHOD FOR STOCK RESEARCH
Introduction
Approaches to get stocks
Steps to research for stocks
CHAPTER SEVEN: PLANNING AND STOCK TRADING
Criteria your plan should cover
Illustrations
Conclusion
CHAPTER EIGHT: PRACTICAL STOCK TRADING STRATEGIES
Factors to consider before setting your trading strategy
Trading time frame
Practical strategy for trading penny stocks
Practical strategy for intraday traders/day traders
Practical earnings report strategy
Practical swing trading strategy
CHAPTER NINE: HOW TO OPEN A TRADING ACCOUNT
The procedures
Factors to consider before choosing your online broker
List of online stock brokers and their contacts
Know your commission
CHAPTER TEN: KNOW YOUR CALCULATIONS
CHAPTER ELEVEN: RISK MANAGEMENT
Introduction
Types of investment risks
Diversification
Leverage
CHAPTER TWELVE: CAN I DEMOTRADE GLOBAL STOCKS? PRACTICE ACCOUNT
Introduction
How to play virtual stock games
Owning a virtual portfolio
CHAPTER THIRTHEEN: WORD OF ADVICE FROM THE STOCK MASTERS
Investing Warren Buffet way
Investing Benjamin Graham way
Investing Peter Lynch way
Investing William O’Neil way
Investing Philip Fisher way
General trading advice
CHAPTER FOURTHEEN: GLOBAL COMPANIES AND THEIR SYMBOLS
List of 30 Companies making up Dow Jones
List of some Companies across NASDAQ, S&P 500, NIKKEI 225, FTSE 100
List of some Companies in OTCBB and NASDAQ $5
REPOSITION YOURSELF AND PARTICPATE IN THE GLOBAL ECONOMY (An article by Jane)
DISCLAIMER
AUTHORS CONTACT INFORMATION
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INTRODUCTION
Investment is like a seed that when sown it germinates and bears fruits. Investing for tomorrow may require deferring today’s pleasure. The problem most people have is the inability to save and even when they do, they lack the knowledge of sowing the seed of investment. It is very important to save no matter how little. Cutting your expensive lifestyle and spending money only on the necessaries will make a lot of difference. An art of saving is a habit that when you pick it up, you will forever be happy with yourself. After savings, there is need for a bolder step of committing those funds into good yielding investment alternatives.
Investing in the stock market is an art, not a science which gives it a big room for every body no matter the level of your education. It takes your time, effort, and willingness to learn and then apply the obtained knowledge in other to gain a success in this market. Stock market investment is so wide that it can contain every individual with his/her varying investment objectives. Some choose to go into short-term investment which is regarded as active stock trading while others can choose medium-term or long-term investment objective. Though it is realities that people even the experts loose money in this market, but applying the right strategies reduces your risk of loss while your profit keeps running. Stock market investment is one of the vehicles many people all over the world take to reach their place of vision.
I was motivated to write this book due to the quest for a practical investment education among Africans and my desire to share my knowledge with others. What makes a difference in a man's output with another man is the different amount of information they have. If you are given access to the same pool of information, then there wouldn't be much difference between you and that rich guy in the next neighborhood. This book is written in ordinary man's language to help any one who has the interest to engage in global stock trading or long-term investment in stocks, regardless of your academic level. It contains a practical step by step guides every beginner need to understand and to make enormous returns from the stock market.
There was a day I went to a bank, after my transactions I gave one of the bankers our business flyer. She looked at it and saw where it was written boldly “GI investment”. She asked, “This Company’s investment is it for real?” Then I responded, “Why do you have to give people money to invest for you when you can do it yourself? All you need is to learn the skill and our company is out to help you to acquire the needed skill”. No more fear of loosing your money to fraudsters who will promise you enormous returns and at the end they will not deliver. Learn how to do it yourself, take charge of your finance with the Secret Practical Guide for Stocks Beginners.
Moreover, it is pertinent to note that you don't need to be a millionaire before you can invest in the global stock market. I started with only $300 which I invested in penny stocks and it yielded over 100% returns in less than a month. You can make over 1000% returns daily in global stocks due to its volatility.
“SECRET PRACTICAL GUIDE FOR STOCKS BEGINNERS” is designed to help all who have a quest to learn international online stock trading to achieve their feet with sound basic knowledge and practical guide. It unravels the secret of good trading foundation by relating with the readers in a practical and theoretical way. I have come across so many books on stock trading but they are mostly based on only theoretical views which leave the readers wanting.
Taking a look at the content of this powerful book, I will call it “two-in-one”. This is because it did not only cover practical lessons on international stock trading but also serves as a motivator to a financial liberation.
Chapter one of this book takes you through motivations and how to set your goal in life. This is where you will need to discover the power of your mind and how to use it to accomplishments. Moving further, you will learn all those things required of you to start this journey and also the foundation knowledge of stocks, the stock market, and how it operates. The basic terms used in the world of stocks are picked and explained to also add to your basic knowledge of stocks. It elaborates the fundamental and technical analysis of stocks. While the last chapter gives you a practical guideline on how to select your stocks and a step by step guide of how to carry out your research on those stocks.
Moreover, it helps you to understand the need for planning and how to make your successful trading plan. Planning is very important aspect of a successful business and this book added illustrations that will give you a clearer practical view of how your plan should be. There are many strategies used by expert traders to make millions from the stock market which are studied in the following chapters. These strategies includes: strategy for trading penny stocks, earnings report strategy, day trading and swing trading strategy.
A guide to open your global stock trading account by learning more on choosing your online stock brokers and necessary calculations you need to know in other to add professionalism to your trades.
Furthermore, you will learn how to use a virtual account and games to practice your trading skill before risking your real money. You need to protect your capital if you need to make money, which made me to bring in the important risk management strategy in other to protect you against losses. Also, know the trading advice from experienced traders.
Finally, the pages are garnished with notable motivational quotations to inspire you to the next level.
A man who searches for knowledge equips himself with power to conquer. I will say, searching for knowledge is not enough but applying it. Applied knowledge is a wisdom therefore, be wise. Put all the knowledge you gain here into practice and your life will never be the same.
MEET ME AT THE TOP!
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CHAPTER ONE
MOTIVATIONS/GOAL SETTING
Allow me to ask you these questions. What is your perception about yourself? Where do you want to be in the next five years? What do you hope to achieve trading stocks?
Sincere self assessment is very important before you venture into any kind of business. Pick up your pen and paper and answer the questions above before you ride on with me on this journey of a financial liberation. You will be happy you did.
THE POWER OF THE MIND
Your mind is like a power engine that determines where you are today and where you will be tomorrow. It is the secrete place where the key to your success is hidden. Discover this key and unlock yourself to a financial freedom. To be an achiever, you need to conceive it first in your mind. You must think success and believe success. Your personal belief system control every aspect of your life so, you can use the power of the mind to create a positive changes in your life.
You can work on your mind to work for you effectively by using the principle of positive confessions and the principle of repetition. By positive confessions I mean you should see beyond your present situation, develop positive thoughts and orally express your thoughts. I always think of myself as an achiever and confess that with the words of my mouth. Those of you out there who think you have struggled in life and ended up failing; I have a message for you. The earlier you stop calling yourself a failure the better for you because failing today doesn’t make you a permanent failure but an experience which grants you a stepping stone to your success. Look around in the life history of great men and women we have in the world today you will find out that they have failed some time ago. That did not stop them from achieving their success because even in the presence of their loss they believe they are winners and not a looser and prepares their mind to accept them as winners.
The second principle which is repetition is telling you to repeat those positive confessions about yourself day by day. By doing so you are giving orders to your mind. Do you know your mind can carry out orders as if it were a person and it can act on your dominating thoughts? When you repeat your positive confessions it enters into your sub-conscious mind and acts automatically. The same thing happens to your everyday thoughts. There is this man whose work is to pick garbage from the dust bin, but he always says to himself, “I am made to have unprecedented achievements”. I heard he says this to himself everyday he comes to work at the refuse dump and fifteen years later, he was recorded as the first man to open a recycling company in his State. Thoughts of limitation and poverty will be logically concluded into poverty.
RETIREMENT PLANNING WITH THE RIGHT MINDSET
The word retirement sounds so unfriendly to an average African man but to the civilized, it may generate a smile on his face. Why this? I have come to realize that the problem with the black man is lack of retirement plan. When he hears of retirement, what goes through his mind is that these people want to deny me my means of livelihood. Some will go to the extent of falsifying their age in other to extend their stay working. It doesn’t help. A civilized man starts from his days of youth to set aside and plant seeds that will generate a paradise for him when he retires. This is the reason why he smiles when he remember about his retirement. These seeds involve a diversified investment to spread risk across. How much money do you think you need to retire in a style you want?
Let us illustrate this to make you understand that to be rich requires having the right mindset, doing the right thing, being consistent in doing the right thing and focusing on achieving your goal. World of the rich is not only for some selected few which you may be thinking you are not among.
There is this young man who started working in a company XYZ at the age of twenty and will be retiring at the age of sixty. He earns $500 monthly for the first five years in the company after which his salary rose to $700. He decided to save up to 15% of his monthly salary each month he receives his pay. This makes it only $75 entering his savings accounts monthly for the first five years he worked and later $105 when his salary was increased. He did not stop his actions at savings but also researched for good investment alternatives investing into good fund management and into companies with strong fundamentals, good future prospects. He also receives annual dividend from these companies which he reinvested into his portfolio.
At the age of thirty his salary rose to $1500. Being that he is married with so many responsibilities to meet up as a father and as a husband; he cut the percentage of his salary he saves every month from 15% to 6%.
Assumptions
Assuming that $1500 is the constant salary he receives till he retires at sixty. At only 6% savings it means he saves $90 each month making it $1,080 ($90 ×12 months) invested annually till he retires.
Investment in the stock market can yield well above thousands of returns on investment on income annually but assuming this man generates a moderate constant 100% return on investment (ROI) annually through out his working period.
Using the power of compound interest, this will be the outcome of his investment capital as he consistently follows his plans with commitment and patience.
We are going to illustrate this by breaking his investment plans into THREE STAGES
STAGE 1: he saved $75 (15% of $500) monthly making it $900 invested annually at 100% ROI annually.
|
YEARS
|
ANNUAL INVESTED CAPITAL in dollar |
ROI @ 100% annually ($) |
OUTSTANDING INVESTMENT CAPITAL @ the end of the year ($) |
|
1 |
900 |
900 |
1,800 |
|
2 |
1800+900= 2700 |
2700 |
5,400 |
|
3 |
5400+900= 6300 |
6300 |
12,600 |
|
4 |
12600+900= 13500 |
13500 |
27,000 |
|
5 |
27000+900= 27900 |
27900 |
55,800 |
At STAGE 2: his salary was increased to $700 making his monthly savings to increase to $105 (15% of $700) for the next five years.
|
YEARS |
ANNUAL INVESTED CAPITAL in dollar |
ROI @ 100% annually ($) |
OUTSTANDING INVESTMENT CAPITAL @ the end of the year ($) |
|
6 |
55800+1260= 57060 |
57060 |
114,120 |
|
7 |
114120+1260= 115380 |
115380 |
230,760 |
|
8 |
230760+1260= 223935 |
232020 |
464040 |
|
9 |
464040+1260= 465300 |
465300 |
930,600 |
|
10 |
930600+1260= 931860 |
931860 |
1,863,720 |
STAGE 3 shows another change in his investment plans as this our wise guy is living the life of a family man with a whole lot of responsibilities resting on his shoulder. He has to cut down his savings from 15% to 6% even though his income increased to $1500. He will now be saving $90 monthly for the next thirty years that he will be working in the company and this means $1,080 is invested annually. Using our same powerful mathematical tool called compound interest you will arrive at an amazing figure. Therefore, people like this think of their retirement as a time of harvest for all their labor and not a period to be afraid of.
SEVEN IMPORTANT THINGS YOU SHOULD KNOW ABOUT THE RICH AND THE POOR
What do you think that makes a difference between the rich and the poor? I know you will be saying yes there are a lot of differences. Among the rich, we know that there are the very rich and those who are just financially comfortable. Everyone will say I like to be rich but paying the price to accumulate wealth will then differentiate those who really want to be rich, those who just want to be comfortable and those who prefer to be at the bottom class. Whatever class you choose, the world of stock trading is so wide to accommodate you to reach your goal.
It doesn’t matter if you are rich or poor today. What matters is that you possess these qualities discussed below or try to change your mindset to possess them, even though you are presently poor; you are on your way to a wealth creation
Rich people believe that they create their life while the poor believe life happens to them. The holy book made us to understand that the Almighty God created us in His own image. Hence, we are created by the creator and have the ability to create. It amazes me whenever I see people sleep and wake up without any plan for their lives or any actions to improve their lives but rather choose to leave everything in the hands of faith. Believe it or not, whatever life you want to have today you already have the power to turn around every challenge and create your place of dream. I was in my sitting room one day watching Barrack Obama’s inspiring campaign. Looking at the life history of this African American man, he has always strived to that road of greatness before having the opportunity to stand before the American people and the world at large to contest for the noble position of American presidency. Where he is today; he worked for it yesterday and where he is going tomorrow; he is working for it today. I told my younger brother who was sitting next to me that if he wants to be great tomorrow he should not wait for the hands of faith to bring that greatness to his door step. You have the power to create your tomorrow and start it today. Take responsibilities and act to turn your life around if you want to join the rich. There are some people who derive their joy by playing a victim of poverty when they have not put forward any effort to change their lives. The poor stays at the corner accepting whatever life throws at him without making an effort to change it.
Commitment is the word use to describe the rich. Commitment is the willingness to work and give your energy and time to a job or an activity. The rich know what they want and are committed to wealth creation. Can you pause for a minute and ask yourself how committed you are in doing whatever you are doing to generate wealth? Sincerely, tell me what your response is. A true business man will tell you that punctuality is the soul of business and he is committed to being punctual. A rich man is always serious with his business putting his best to yield a resourceful result. I have heard stories upon stories of some young men who wasted their years as vagabonds. All they do is to play around and play away their time. They don’t know what they want in life, no vision and no commitment. Differentiate yourself from them no matter the economic level you find yourself today put in your best to climb the ladder of prosperity.
The rich focuses on opportunities while the poor on problems. One of the richest female motivational speaker of our time Oprah Winfrey described luck as when preparedness meets opportunity. A young African guy is dreaming of working as an executive in one of the biggest oil companies in the country but the ill thing is that he dropped out of primary school. So tell me if the opportunity of joining one of these fat salary paying oil companies comes knocking at his door, how will he be able to secure the job? With what qualifications? Opportunities come in life so you need to be prepared to be able to grab it and make good use of it. Yes! To focus on opportunity you need to be prepared mentally, physically and spiritually to be able to make good use of the opportunity when it presents itself.
Moreover, Fear has beclouded the mindset of the poor that he sees problems even in the midst of opportunity. He only thinks of what will go wrong or it won’t work for me even in the face of a golden opportunity. Opportunities come in life and you need to identify it and make something good out of it. That’s the way of the rich.
They work with self confidence, grab every good opportunity and turn it into a success. They are willing to take higher risk for higher rewards. According to Napoleon Hill an author to best selling inspiring book “Think and grow rich”, he said that no man is free until he learns to do his thinking and gains the courage to act on his own personal initiative. Are you confident enough to act on your own personal initiative? I will like to drop a secret to attain a self confidence but before I do that hear this story about a friend of mine. There is a good friend of mine, a business woman who has a hundred thousand naira locked up in a savings account. She is planning to save up to a million naira to own a landed property in six years time. Nice dream with a poor plan. When I came into the picture, I advised her to invest the money into good stocks that can yield over 500% returns in less than six years time. But she responded, “Me? Invest in stocks? Stock market is for big people. Mhhh! That one is a big risk! What if the stock market crash and I loose all my money? I rather keep my money intact in a bank account…” This is an opportunity to realize her goal presented before her but she turned it down out of fear. You may be right if you say stock market do crash but know that there are good stocks from companies with strong fundamentals which can stand a bearish market and paying you a nice dividend. Such companies are good for long term investment. What matters is the amount of knowledge and information you acquire because whether in the bearish or bullish market there are investors who loose and there are some who gain. You have to build your self confidence by analyzing who you are, equip yourself with the right skill, have a self discipline, develop an attractive personality by having a right mindset and think positively. Be confident and play your cards well.
Rich people think big while the poor has a limited mind. You may be poor today but there is difference between you and other poor people because, you know whom you are and where you are going to. Think it you can achieve it. Millionaires reason like a millionaire.
Rich people are stronger than their challenges. Being a rich man, though facing tougher challenges but you are stronger than your problems. Creating wealth is not easy due to the challenges, obstacles, hurdles and disappointments you encounter. But believing that even if this door closes, another will open as you strife for riches you will not be caught down by problems but overcome them. Though the road is not easy but you can make it work. Also believe in your creator The Almighty God who has offered you a helping hand in this life journey. Check out Ephesians 3:20.The secret to success is not to run away from your problems and responsibilities but growing yourself big enough to overcome them.
Rich people love what they do while the poor looks for whom to blame. As I said earlier on it doesn’t matter where you are now but where you are going tomorrow; all you need is to love what you are doing so that you can be able to do it well. Doing it well will give you a stepping stone to where you are going.
I read a story in a newspaper one day about a man who lost his job after ten years as an income earner but made his first million as a laundry man. Mr. Charles has always been a responsible father and a husband who worked in a local factory but lost his job due to some internal misunderstanding within the company. When he was sacked, he spends his time doing laundry at home. He said that washing and ironing cloths is something he enjoys so much doing. Contrary to some people who may see it as a tedious job Mr. Charles enjoys it as a hobby. At a time, it came to his reasoning to turn this hobby into an economic usefulness. Then he went to most of his friends who are busy bankers and have no time to do their laundry by themselves to collect their dirty clothes, wash and iron for some little pay. With the satisfactory services his friends received from him, they started introducing their other friends to him. His little laundry business started growing day by day with more and more people coming for his services. According to Mr. Charles he believes in dedication to duty and knowledge which made him to opt for a few months course on dry cleaning. The knowledge he gathered and his savings helped him in the expansion of his business from little to one of the biggest laundry home in their city. A passion turned into business. When you love what you do, you will be open to learn, correct your mistakes and do your work very well. Today, this man once jobless owns one of the biggest dry cleaners in their city.
Change your mindset from limitations to unlimited success, from small to big, from impossibilities to possibilities, from poverty to wealth, from bondage to freedom, from inferiority to self confidence and from nobody to an achiever.
Think it and you can achieve it. Are you the type who sees yourself as a failure? You need to change and be positive about yourself. The Holy Bible makes us to understand that there is power in the spoken words. The world was made with the power of the word. With your mouth you can bless and also course yourself. Which part did you choose; bless yourself everyday with positive pronouncements or curse yourself?
Rise up, take your destiny into your hands and change your life!!!
SETTING YOUR FINANCIAL GOAL
A Goal is a vision or a dream of where you want to be in the time to come with the specified time of actualizing the dream. Everyone want good things of life like luxurious houses, cars, wealth, recognition, power and so on; but most people never go far beyond the stage of having a mere wish. Successful men who know what they want of life were determined to achieving it; they go beyond the wishing stage. A wish should be intensified with a burning desire and this desire should be followed by a mapped out plans and actions to get to the realization of the goal.
In setting your financial goal, there are four major things you must put into consideration, they are:
Know that it is necessary to set goals in your life. A life without a goal is like a vehicle without a destination which can stop anywhere whether at the right or wrong place when the fuel runs out. You can set goals in your lifestyle, marriage, academics, spiritual life and finance. Here we are emphasizing on setting your financial goal. You don’t jump into stock trading because everyone around are into stocks but you should define what you hope to achieve trading stocks.
Be realistic about your goal. Don’t set goals that will end up in paper and pen. But, set goals that you believe in your heart you can achieve.
What is the targeted time period for your goal? A good goal must have a time period you marked for its achievement. For example, I want to own a mansion in Victoria Garden City in five years time. This is a goal to be achieved in five years time therefore, making it easier for goal measurement.
Make plans to achieve your goal. What differentiate a wish and a goal is the fact that a goal is meant to be achieved through actions while a wish ends up here and now. You need a long-term plan for the long-term goal. Set up a medium-term and short-term plans that will follow the long-term plan. This means you should break your goal into monthly, weekly and daily goals. Have a broken down step by step plans to achieve it.
The stock market is one of the vehicles through which individuals achieve their financial goal. World of the stock market is very big and cut across different regions of the world, different securities, different classes of companies and so on. It is so big enough to help you create a massive wealth according to your dreams.
For more on motivations visit www.homeofachievers.blogspot.com
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CHAPTER TWO
THINGS NEEDED TO START GLOBAL STOCK TRADING
You need a computer with internet connection.
Any type of computer is okay, though a laptop is more preferable because of its portability and ease to carry around. There are different alternatives to internet connections. Make your inquiries and choose the fast and reliable option.
The knowledge of the market is very important.
Full knowledge and understanding of the stock market is needed before you can venture into stock trading. This book contains the basic and practical knowledge of all that you need to know to start trading stocks. You will be able to understand the market and its fluctuations better and how to take advantage of it with good trading strategies and plan. As I always tell my students, don’t stop learning, read on and research for more knowledge.
You also need a good stock broker to serve you well.
There are two types of brokerage firms and they are: a full service brokers and a discount brokers.
A full service brokers are more expensive but renders more personalized services. They work with their clients by giving them financial advice, recommendations, and carrying out their primary broker services to help see that their financial objectives are attained.
A discount broker renders a cheaper service which makes it more affordable to attract more investors. Unlike the full service brokers, they don’t engage in personalized services. This means that you are on your own in making decisions and creating your investment strategy even though they will provide you with trading resources. It is left for you to decide on which among the two types you choose to carry out your stocks investment with.
For a complete list of online stock brokers and how to choose a good online stock broker, refer to the Chapter 9 of this book
Finally, you need a capital to start buying stocks.
The minimum start up capital depends on the broker as it varies from broker to broker. Some brokers ask for $500, $1,000 or even $2,000 minimum start-up deposit. There are some brokers with no minimum requirement; which means you can start with any amount. Inquire from your broker.
RESOURCEFUL INVESTMENT SITES
Investment and trading of any financial security requires good and updated information which helps you to make informed decisions. It will be an added advantage to list some of the good investment sites you can find over the internet for your successful investments. These sites offer free investment ideas, tools, market analysis, articles, educational books, news, portfolio management techniques, stock quotes and more on stocks, bonds, ETFs, options and other securities. Visiting these sites is a way of educating your self more on stocks and other investment vehicles.
They are:
Yahoo finance
Google finance
CNNMoney.com
CNBC.com
Motley fool
Smart money
Barron’s online
MarketWatch.com
Thestreet.com,
Business week
Clear station
Jason Kelly
Briefing.com
Morning star,
Forbes.com
Investopedia.com
StockBarometer.com
Optionetics.com
For Charts: StockCharts.com, BigCharts, Propheticfinance.com
For economic data: tradethenews.com, economy.com, freelunch.com
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CHAPTER THREE
WHAT IS A STOCK AND A STOCK MARKET
DEFINITION OF A STOCK
If you own a business, divide the assets of the business into small pieces and sell those pieces, you have issued a stock. When a total value of a business asset is broken down into smaller pieces and sold to another person, the ownership is said to be transferred to that person. A stock is a fraction of ownership in a company and represents a claim on part of the company's assets and earnings.
DEFINITION OF A STOCK MARKET
The stock market is any medium where buyers and sellers of securities like stocks, bonds, etc meet for the purpose of trading. This arose by the need of companies seeking fund to expand their businesses and the need of investors seeking to be part of those companies in order to share in the privileges. It can also be called stock exchange. The stock exchanges can be either a physical market (e.g. Nigerian Stock Exchange, New York Stock Exchange, AMEX etc) or a virtual market (e.g. NASDAQ, OTCBB, PINKSHEET etc). Virtual market makes use of network of computers and telecommunication. The stock market provides companies with access to capital and also gives investors the right to own part of the company’s assets and earnings.
It exists to promote the formation of capital for both individuals and corporations by providing them with the opportunity to raise long term capital. Companies prefer to raise their fund from the capital market rather than the money market because of a high interest rate.
EXAMPLES OF GLOBAL STOCK MARKET INDICES
AMERICAN MARKET INDICES
NASDAQ 100
S&P 500
DOW JONES
EUROPEAN MARKET INDICES
XETRA DAX
FTSE 100
SMI
CAC 40
INDIAN STOCK MARKET INDICES
Bombay sensitive
CNX Midcap
CNX Nifty Junior
TYPES OF STOCKS
There are three major types of stocks namely: blue ship stocks, mid stocks and penny stocks
The blue ship stocks are the stocks of well established and financially balanced companies. These types of stocks are stocks of financially sound companies making it a less risky investment. It can be classified under the Mega CAP and the Large CAP. The Mega CAPs are companies with market capitalization of over $200 billion while the Large CAP is over $10 billion
The mid stocks are stocks classified under the Mid CAP stocks and Small CAP stocks. The Mid CAP is companies with market capitalization between $2 and $10 billion while the Small CAP is between $300 million and $2 billion. The market capitalization can be calculated by multiplying the number of shares of a company by the price of its stock. This type of stock is more risky when compared to the blue ships due to its volatility but can yield hire returns.
Penny stocks are stocks that trade for below $5 on the over-the-counter (OTC) market like NASDAQ, OTCBB or the PINK SHEET. It is classified into two namely: micro cap stocks and nano stocks. These set of stocks are highly risky, they are smaller than the mid stocks. Most of the Wall Street investors hate this class of stocks because it is the most risky. The price of the stock moves like a jet which has the tendency of generating more than 1000% change up or down within a day. These are stocks of small companies and most of these companies run most of their financial activities on borrowed funds having more tendencies to fold up.
HISTORY OF STOCK EXCHANGE
There is a need to provide finance for businesses and to generate returns on investment which led to the establishment of stock exchanges. Stock Exchange was established in the 16th century in Belgium. These early traders gather in the major financial hub called Antwerp in 1531 to make speculation on the prices of commodities and shares.
London stock exchange is one of the oldest stock exchanges which count its existence dated to the 17th century. New York Stock Exchange (NYSE) originally called “Curb market” because its brokers executed their trades in the street; one of the world’s most popular and powerful stock exchanges was established in 1792 when twenty four New York City stockbrokers and merchants signed the buttonwood agreement.
India stock exchange Mumbai from Asian continent was established in 1875 as “The Native Share and Stockbrokers Association”. Today this exchange is popularly known as the Bombay Stock exchange (BSE). In India, there are other major stock exchange known as the National Stock Exchange of India Limited (NSE) and this was established in November 1992.
The NYSE Euronext merger in 2007 marked a mile stone in the history of global financial markets. It brought together major market places across Europe and US. Its combination was by far the largest of its kind and the first to create a truly global market place group.
STOCK READING
S
tock.
Price of the stock
B
MW
21.75 0.06 0.27%
percentage increase
Amount gained. Up green arrow showing increase in price
B
ARCLAYS
148.6 0.89 (0.60%
Down red arrow showing decrease in price
D
EUTSCHE
BANK 20.05 0.00
Zero change in the price
From the illustration above, it will be easy for us to get summary of what happened to a stock during and after the trading day by looking at the stock reading. Stock reading gives us a summary of a stock action in respect to the previous trading day. A stock reads with green arrow shows there is an increase in the price of the stock from the previous day trading while a red downward arrow shows a decline in the price of the stock from the previous day. Sometimes you see a stock with up and downward arrow neither red nor green which describes the state of the stock as no change in the price of the stock.
MARKET INDEX
Market index gives a sense of direction to the market it represents. It represents a change from an original or base value over time. It shows if the market is up or down. It is a method of measuring a stock market as a whole. A stock market index is a method used in measuring a section of the stock market. It shows the state of the market at the closing time of the market on a particular day. A market index is a single figure that gives the sum of the overall performance of the market on daily basis. It is the pulse rate of the economy. When an American economy started depreciating in 2007 due the credit crunch, it was reflected in their market index where their main indices like DOW, S&P 500, showed a declining market index day by day. Usually when an economy is bad, there market index shows a decline (though there are exceptional cases) and when an economy is strong and stable it is reflected by an increase in the market index of their exchanges.
This is calculated by finding the weighted average of the most actively traded stocks, where the weights are generally in proportion to the market capitalization of the company.
There are numerous stock market indices like: Dow Jones Industrial Average (DJIA), NASDAQ Composite, PINKSHEET, Standard and Poor's 500 (S&P 500), Over The Counter Bulletin Board (OTCBB), FTSE 100, NIKKEI, Toronto Stock Exchange, Australia Securities Exchange, etc
The three most popular market indices are DJIA index, S&P 500 index and NASDAQ Composite index.
DJIA index: this is the oldest and constitutes of thirty stocks of most influential and highly capitalized companies in America.
S&P 500 index: this includes 500 most traded and powerful companies which covers about seventy percent of the market totals.
NASDAQ Composite index: this constitutes all the stocks of more than 5000 traded on NASDAQ market. It is heavily weighted to technology stocks. This market is more volatile than the two markets above.
DETERMINANTS OF A STOCK INDEX
Liquidity: the liquidity of a stock is the state of a stock that can be easily exchanged. Using liquidity to determine a stock index is by measuring it by the impact cost criterion. Impact cost is the actual cost facing an investor when trading the index. A stock that has a lower impact cost is said to be highly liquid stock.
Optimum size: this is one of the parameters that should be put into consideration before constructing a stock index. Optimum size is the best possible size of an index. It is good when there are so many stocks listed on an exchange because it enables an ease of diversification but too many stocks may not be good. This is because it can lead to addition of dormant stocks in the index making it riskier to select good stocks to invest in.
Having number of stocks from ten to thirty creates an index with liquid stocks like Dow Jones Industrial Average (DJIA) which is comprised of thirty stocks.
Averaging: there are two fundamental reasons that create a movement in the prices of stocks. They are economic news and company news. Company news which is kicked off by proper averaging can only move the stock of the company and not the index. Economic news can move the index of the country the news is meant for. In averaging we have price weighted average which assigns weight in proportion to the stock prices, the market capitalization weighted average which deals with the capitalization of the company (the market value of all outstanding shares of the company) and equal weighted average which assigns an equal weight to all the stocks regardless of their prices and capitalization.
Diversification: this comprises of touching different stocks across various sectors of the economy in other to reduce the risk associated with investment. An index should put into consideration and reflection to all the sectors of the economy in other to give a true index.
TYPES OF MARKET INDEX
Specialized index: this is a market index with a specified industry or sector
index covering a particular sector of the economy and serves as the benchmark for that industry in particular. For example we have S&P Banking index comprising of stocks from the banking sector.
Broad-market index: this type of index is comprised of all the large liquid stocks of the nation and becomes the benchmark for the entire capital market.
ADVANTAGE OF INTERNATIONAL STOCK TRADING OVER LOCAL STOCK TRADING
Instant execution of order: It is no news how orders are delayed in local stock trading. I personally bought a public offer from a local company which took up to a year to get those shares credited to my account. Placing a buy order you have to take your time and stress going to your broker’s office to fill your order and then have to wait for the next day for your order to be taken to the market. This is one beautiful thing I enjoy about global stock trading you don’t need all those stress just by the click of your mouse, ''buy or sell'' your orders are executed. This is possible because the international stock broker will give you access to trade directly from his platform through internet enabled computer which links you directly to the stock exchange. Here you are trading the same way a broker should trade.
Access to information: Unlike the local stock trading where access to information is most times restricted or delayed, international stock trading gives every investor an access to real time information about the companies they are buying into making it a less riskier to invest. There are countless of research institutions on the web ready to provide enough information for the investors. Through financial search engines you can source for information, current news releases, financial data or anything about the company you want to invest in.
Higher yield on investment: Prices of stocks on Nigerian stock exchange are regulated not to exceed 5% daily. But, global stocks are more volatile and can run over 1000% returns on investment (ROI) a day depending on the stock type you picked.
The advantage of leveraging your account: Leverage is borrowed money which increases your buying power. It comes from your broker in the form of 1:2, 1:4 and so on. If you are using 1:2 leverage, it means your investing amount let's say $1000 multiply by two which will give you a purchasing power of $2000.
The advantage of short trading: Short trading means opening a trade with a sell position. This means that trade is not only open with a buy position but also with a sell position. When a trader speculates a fall in share price of any company, he open a position by selling their shares and close position by buying back to make his profit if the price actually fall. The story is quite different with local stock trading where you can only open a position with a buy order.
Access to your account: an investor has an access to monitor his account 24 hours. This is quite unlike the local stock trading where access to view account is only monthly or when demanded by an investor. Global stock trading allows you trade directly from the floor and monitor your account just the same way a broker does; through your brokerage account area given to you by your broker, you can access virtually every stock traded on any stock exchange local in any part of the world.
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CHAPTER FOUR
DEFINITION OF MARKET TERMS
Account: the record of an investor’s transactions by his broker.
Annual report: a publication including financial statements and a report on operations, issued by a company to its shareholders at the company’s fiscal year-end.
Arbitrage: the simultaneous purchase of a security on one stock market and the sale of the same security on another stock market at prices which yield a profit. The practice of buying shares in one place and selling it in another place where the price is higher.
Ask price: this is the price an investor pays for a security. In a quote, we have Ask price and Bid price which is the price the investor can buy and sell a security respectively at that point in time.
Averaging down: to average down means buying more of a security at a price lower than the price for the initial investment which in turn reduces the average cost per unit of the total investment.
Bear market: this is a market where prices of securities are falling. The opposite is bullish market where prices of securities are in an upward trend.