Like many of us out there, I too was thinking that both being a ‘trader’ and an ‘investor’ are the same but actually they are not. Lets look at them.

Trader

A trader is someone who invests in the stocks of a company without having any real interest in the company behind the stocks. A trader buys a stock in anticipation of a positive price movement in the future. When there is such movement he then sells the stock for profit and move on to other stocks. It is also better known as speculating.

Investor

An investor is someone who is interested in the company which issues the stock instead of the stocks alone. An investor will thoroughly analyze the company in which he is interested to invest and tries to understand whether the company has a long term growth potential. He his more interested in the long term benefit through his investment.

A trader may not hold a stock very long or may hold it a long time, depending on its performance. An investor, on the other hand, buys a company with the intention of holding on to the stock for a long time. If the price of the stock of a ‘trader’ falls at a certain level, he will not hesitate to sell them to prevent big losses but an ‘investor’ might not because he is more attached to the company. Now the question is whether this is a good step. Well, it depends. If the company of the above mentioned stock performs well in the future resulting in increase in its stock price, the ‘investor’ who retained the stocks will benefit and the ‘trader’ who have sold the stocks has nothing to be gained. So, if you are an ‘investor’ in any company, make sure you have really analyzed the company’s potential growth before you remain holding the stocks even though its prices are falling.But I guess most of us are traders who wish to benefit from the positive price change of a stock right?

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We all have this wonder on how the stock prices change so frequently but most of us have no idea about it. Well, before we try to understand how the prices change we must understand the difference between the primary market and the secondary market. All stocks are initially issued in the primary market where the issuer is directly involved in the transactions. Once the stocks begin to trade between the traders, they become part of the secondary market.The company which issued the stocks are not directly linked with the trading in the secondary market. The trading we are referring to is in the secondary market.

In the secondary market, the prices of stocks are determined by the supply and demand of each individual stocks. When there is more supply than demand, price of a stock falls and when there is more demand than supply, price rises. This is the phenomena which decides the price of a stock, but what causes the supply and demand change?

Well, this boils down to the concept of stock valuation. Basically, a stock is valued by the dividends it will provide in future. The value of a stock is actually the present value of all future dividends that it is expected to provide.(just understand this concept). Don’t equate a company’s value with the stock price.So if a company is expected to perform well in the future, giving it more profits,hence giving more dividends to its investors, it will have a high value. Investors who recognize this will now look at the stock price of the company. If the stock is undervalued, which means the market price is lower than its original value, investors will proceed to buy the stocks causing the demand for the stocks to increase ultimately increasing the price of the stock. On the other hand, when investors find out that when a particular stock they are holding is overvalued, which means its market price is higher than its original value, they will proceed to sell the stocks causing the supply of that stock to increase which will reduce the price of the stock.

However, it’s not just profits that can change the value a stock (which, in turn, changes its price). There are also other factors such as variables, ratios and indicators which affect the price of stocks. Some you may have already heard of, such as the price/earnings ratio.

So, why do stock prices change? The best answer is that nobody really knows for sure. Some believe that it isn’t possible to predict how stock prices will change, while others suggest that by drawing charts and looking at past price movements, we can determine when to buy and sell. The only thing we do know is that stocks are very volatile and can change in price extremely.

The important things to understand about this topic are the following:

1. At the most fundamental level, supply and demand in the market determines stock price.
2. Theoretically, earnings are what affect investors’ valuation of a company, but there are other indicators that investors use to predict stock price. Ultimately, it is investors’ sentiments, attitudes and expectations that affect stock prices.
3. There are many theories that try to explain the way stock prices move the way they do. Unfortunately, there is no one theory that can explain everything.

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After knowing what are stocks lets look at how stocks are traded. When we say trade, we are referring to the process of buying and selling stocks.

Most stocks are traded on exchanges, which are places where buyers and sellers meet and decide on a price.Some exchanges are physical locations where transactions are carried out on a trading floor and others are virtual, where trades are done electronically through a network of computers. The purpose of a stock exchange is to facilitate the exchange of securities between buyers and sellers, thus providing a marketplace (virtual or real). The exchanges provide real-time trading information on the listed securities, facilitating price discovery.In Malaysia, the stock exchange is known as Bursa Malaysia where the stocks are traded electronically.

Obviously, electronic trading is far more efficient and faster. If you wish to learn more about stock exchanges visit Wikipedia.

Now, since we are discussing in a Malaysian perspective, lets narrow down on how to trade stocks in Malaysia. Below is a screen shot from Bursa Malaysia’s website on how to buy and sell stocks.

The step by step guide on this is available at:

Kclau.com

Bursa Malaysia

But before visiting the above sites please learn more about the Central Depository System(CDS)(click this link) because it is the first step to do if you are new to stock trading.

A list of stock broking companies in Malaysia is also provided by Bursa Malaysia. If you wish to browse the list click here.

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As I said in my earlier post, to put money to work for you, you’ve got to invest the money you possess. There are many investment opportunities but the most famous option is investing in stocks. Since there are many youths in our country who want to learn more about stocks, I would like to share my little knowledge about stocks. I’m not a pro in this topic but I can share whatever I know and learn.

So, what are stocks?

Investorwords.com provides the definition of stock as follows:

“An instrument that signifies an ownership position (called equity) in a corporation, and represents a claim on its proportional share in the corporation’s assets and profits.”

(note: Stocks are also known as shares or equity)

It means that when we purchase a company’s stocks, we are actually becoming an owner in the company. However our ownership is only proportionate to the number of stocks we possess relative to the number of stocks issued by the company. The following example will explain this further. Lets say Company A issues 1 million common stocks(type of shares will be explained later) and we have purchased 10000 of them. Our ownership stake in Company A would be (10000/1000000) 1% which means we have a claim of 1% in Company A’s assets and profits. This is just a basic understanding of stocks.

To know further about stocks we must first understand the type of stocks which are available.

There are basically two types of stocks(there are other types of stocks too), they are:

1. Ordinary Stocks
   Also called common stocks. This is the type of stocks which are commonly referred when we talk about shares and in fact it is in this form majority stocks are issued.
2. Preference Stocks
   These are stocks which are preferred as to payment of dividends or any other claims than common stocks.
   There are various types of preference stocks
   1. Participating preference stocks
   2. Cumulative preference stocks
   3. Non-cumulative preference stocks
   4. Redeemable preference stocks
   5. Convertible preference stocks

The difference between these two stocks are as follows:

Payment of dividends:

Preference stock holders are in priority in receiving dividends(usually a fixed rate). Common stock holders only receive dividends after preference stock holders. In the case of liquidation, any remains, after the payment of all the company’s liabilities, will be first distributed to preference stock holders. Common stock holders are the last persons to receive any claim from the company.

Voting rights:

Common stock holders have the right to vote for the board of directors of the company in which they posses the stock. This voting right is normally not given to a preference stock holder.

Why issue stocks?

Now, you might be wondering why companies issue stocks and share their profits with the public instead of keeping it for themselves.

Raising capital is the answer.

We all know that companies need capital to expand our even begin their operations. This capital can be raised by two ways which are through acquiring debt or equity(issuing stocks).

Issuing stocks is advantageous for the company because it does not require the company to pay back the money or to make any interest payments. Instead, it only gives dividend if there is adequate profit.

The risk factor:

Investing in stocks is said to be very risky. This is because, the return from the investment is not guaranteed. Companies are not obligated to pay dividends every year, so the other only way to benefit from the investment is through the appreciation of the value of the investment in the open market. For example, lets say we have invested RM1000 in 100 stocks of company A. We will only benefit from the investment if the value of the 100 stocks increases to a amount more than RM1000 in the future if Company A doesn’t pay dividends. If the value of the 100 stocks drop from our initial investment of RM1000, we will start losing.

Although it sounds to be very risky, investment in stocks outperform all other investments because high risk is associated with high gain. If we are good in choosing the right company and adjusting our portfolio, we can surely get a good return.

To learn more about stocks on a Malaysian perspective please visit bursapursuit.com

Anyway I’ll be adding more posts in this topic in the near future, so keep coming back if you wish to learn some more. Meanwhile, you are very much welcomed to comment on this topic. Thank you.

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