stock exchange (1)
Stock exchange terminology may sound complicated, but the basic principles are quite straightforward.
Shares
If you own shares, for example, in Anglo American, the principle is the same as when you buy a share of a farm or of the corner convenience store.
By acquiring ordinary shares in a company, you own an equivalent portion of that company's capital. That is why you are entitled a share of the profit, which is paid out as a dividend.
Index
The All Share, Industrial and Financial Indices are often mentioned in news reports.
These are the average prices of a selected number of shares listed on the most Stock Exchanges. The best-known international index is the New York Dow Jones Industrial Index. Indices make it easier to identify trends and are used as a measure of investment performance.
Bull market
For a shareholder, the bull is the most wonderful beast.
During a bull market, there is a sustained rise in share prices on a broad front.
However, all bull markets eventually run out of steam.
Bear market
Share prices decline in a bear market and, although short-lived bull runs might occur, the long-term trend remains downward.
Risk
This has a wider meaning than the chance that you might lose money.
The investment manager will often refer to risk as the chance that an investment will perform below a particular index, or as a measure of the fickleness of an investment.
Risk spread
By purchasing shares in different sectors of the economy, such as mining, banking and retail, you reduce your risk, because when the price of one slips, others may be rising.
If you invest in five gold-mining houses, for example, your entire portfolio will perform poorly if the gold industry does not do well.
Price/earnings ratio (P/E ratio)
This gives an indication of how expensive (or inexpensive) a share is.
If Share A trades at 100c and its earnings per share were 20c over the past year, the P/E would be five (the price divided by the earnings).
If Share B also trades at 100c and has earnings of 10c a share, the P/E would be 10, making Share B twice as expensive as Share A, although they are both trading at 100c.
In contrast with this historic P/E ratio, there is the future P/E, calculated according to projected company earnings.
Dividend yield
This is the dividend expressed as a percentage of the share price.
There are two causes of a high dividend yield: the company pays a large dividend, and the share price is very low.
As an investor, you must ask yourself if there is a sound reason for the share price being low. Is the company going under, or is it merely a temporary under-valuation?
Tips
If you've always wanted to own shares, but don't have the confidence to invest directly on the exchange, you could invest in a unit trust fund.
The fund manager makes all the investment decisions.
The private investor has to make use of a stockbroker for direct share transactions.
Brokers can either carry out your instructions or manage your portfolio on your behalf. If you want to learn more, you could agree that your broker will manage your portfolio in consultation with you.
The broker will then decide about buying and selling, but will consult you before performing transactions.
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