Hello, let’s know more about The Basics of Stock Market. Financial markets provide their participants with the most favorable conditions for purchase/sale of financial instruments they have inside. Their major functions are: Guaranteeing liquidity, forming assets prices within establishing proposition and demand and decreasing of operational expenses, incurred by the participants of the market.
Financial market comprises variety of instruments, hence its functioning totally depends on instruments held. Usually it can be classified according to the type of financial instruments and based on the terms of instruments paying-off.
From the point of different types of instruments held the market can be divided into the one of promissory notes and the main one of securities (stock market). The first one contains promissory instruments with the right for its owners to get some fixed amount of money in future and is called the market of promissory notes, while the latter binds the issuer to pay a certain amount of money according to the return received after paying-off all the promissory notes and is called currency markets. There are also types of securities referring to both categories as, e.g., preference shares and converted bonds. They are also called the instruments with fixed come back.
Another classification is due to paying-off terms of instruments. These are: market of property with high Liquidity (money market) and marketplace of capital. The first one refers to the market of short-term promissory notes with assets age up to 12 months. The second one refers to the marketplace of long-term promissory notes with instruments age surpasses 12 months. This classification can be referred to the bond market only as its instruments have fixed expiry date, as the stock market’s not.
Now, let’s moving to the stock market.
As it was mentioned before, ordinary shares purchasers typically invest their funds into the company-issuer and become its owners. Their weight in the process of making decisions in the company depends upon the number of shares he/she possesses. Due to the financial experience of the company, its part in the market and future potential shares can be split into several groups.
Shares of Large companies with a long record of profit growth, annual return over $4 billion, large capitalization and constancy in paying-off dividends are referred to as blue chips.
Shares of such company grow faster, its managers typically pursue the policy of reinvestment of revenue into further development and modernization of the company.
Income stocks are the stocks of businesses with high and stable earnings that pay high dividends to the shareholders. The shares of such companies usually use mutual funds in the plans for middle-aged and elderly people.
These are the stocks whose prices stay steady when the market declines, do well during recessions and are able to minimize risks. They perform perfect when the market turns sour and are in requisition during economic boom.
These categories are widely spread in mutual funds, thus for better understanding investment process it is useful to keep in mind this division.
Shares could be issued both within the country and abroad. In case a company wants to issue its shares abroad it can use American Depositary Receipts (ADRs). ADRs are usually issued by the American banks and point at shareholders right to possess the shares of a foreign organization under the asset management of a bank. Each ADR signals of one or more shares possession.
When operating with shares, aside of purchase/sale ratio profits, you can also quarterly receive dividends. They depend on: type of share, financial state of the company, shares category etc.
Ordinary shares do not guarantee paying-off dividends. Dividends of a company depend on it is profitability and spare cash. Dividends differ from each other as they are to be paid in a different period of time, with the possibility of being higher as well as lower. There are periods when companies do not pay dividends at all, mostly when a company is in a financial distress or in the event executives decide to reinvest income in to the development of the business. While calculating acceptable share price, dividends will be the key factor.
Price of ordinary share is determined by three main factors: Annual Dividends Rate, Dividends Growth Rate and Discount Rate. The latter is also called a required income rate. The company with the high risks level is expected to have high required income price. The higher cash flow the higher share prices and versus. This interdependence determines assets value. Below we will touch upon the division of share prices estimating in three possible cases with regard to dividends.
While purchasing shares, aside of risks and dividends analysis, it really is absolutely important to examine company carefully as for its profit/loss accounting, balance, cash flows, distribution Of profits between its shareholders, managers and Executives wages etc. Only when you are sure
of all the ins and outs of a company, you can easily buy or sell shares. If you are not confident of the information, it is more advisable not to hold shares for a long time, especially before financial accounting published.
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