I remember when I first got out of army years ago, I was working as a IT engineer. Then I was spending alot of times hearing alot of funny  business talks from my managers, CEOs, and managing director

I remember seeing them staring at blankly at the stock exchange and sometimes I wonder what is on their mind.. what is the big picture that I am missing. And whats so mystical about this funny looking exchange chart that they stare at it for hours and hours.

I remember once I hear my business manager said “This is the reason why they get to where they are now”  and started to blab all sorts of funny sentences that I can never understand.

Sometimes along the pantry you can hear many executives talking about companies share prices and how it affects the overall outlook of the company and all the funny things like that…. As a young engineer, I thought that there is something mystical here that I can never understand.

Then, I was thinking, just as the IT world is so mystical to them, the business world is as mystical to me just as well… Until I decided to go breach the gap and  see what is going on at the other side of the corporate games.

I remember this management wannabe who did a long comparision of stock prices of our company vs our competitors and started to blurt all sorts of comments that hardly make any sense to me…

So I decided to google (using the IT skills that I have) on the following “How does stocks and shares work” and I came across a tutorial explaining the basic truth about stocks and shares… and I decided to put them here. The reason is because, I felt that we are all deceive by long business presentations of things that do not matter.

I went on to take a look at Investopedia and decided to summarise a few brutal truths about the stock and shares.  

So, what are stock?

Stock are actually a claim of ownership of a company assets and earnings. It can be called Stocks, Shares, Equity. In the past it was a fanciful look piece of paper that is called a stock certificate. Nowadays it can just be an electronic document. The more shares you own, the higher your entitlement to the profit. Your claim for the assets can only be made if the company’s goes bankrupt.

A company only benefit from stocks for when the stock is first offered to public (AKA IPO).

So How Are Stocks Traded?

So stocks are being traded on the stock market, there is a trading place called Trading Floor, which is where you see people frantically shouting and screaming.  There are other type of a exchange where trading is done electronically.

The main purpose of the stock exchange is really a place for traders to meet and decide on the price of stocks. A stock market is nothing more like a farmers market of people buying and selling the stocks.  There are 2 types of market
a. Primary Market : This is where stocks are created (IPO)
b. Secondary Market: This is where most of the trading are done. Most people refer to this as  “The Market”

What Clauses The Stock Prices To Raise Or Fall?

Sometimes you read this in the news, sometimes you see executives spends hours and hours digging through the newspaper.. Sometimes you hear it over the pantry talk… But… The truth behind this is, Stock prices are determined by supply and demand. If many people wanted to buy a certain stock, the price will raise and if everyone is busy selling the stock, the price will fall.

Its important to know the following
1. At the most fundamental level, supply and demand in the market determines stock price.
2. Price times the number of shares outstanding (market capitalization) is the value of a company. Comparing just the share price of two companies is meaningless.
3. Theoretically, earnings are what affect investors’ valuation of a company, but there are other indicators that investors use to predict stock price. Remember, it is investors’ sentiments, attitudes and expectations that ultimately affect stock prices.
4. 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.

So Why Is The Company So Interested In Her Stock Price?

These are extracts from Investopedia

1. The shareholders are the directors too: The first and most obvious reason why those in management care about the stock market is that they typically have a monetary interest in the company. It’s not unusual for the founder of a public company to own a significant number the outstanding shares, and it’s also not unusual for the management of a company to have salary incentives or stock options tied to the company’s stock prices. For these two reasons, management acts as stockholders and thus pay attention to their stock price.

2. Finance Reason:  Analysts are constantly scrutinizing companies and reflecting this information onto its traded securities. Because of this, creditors tend to look favorably upon companies whose shares are performing strongly

3. Investors Wrath: There are risk where investors may oust the management in a proxy fight.. But I guess this doesnt happen all the time unless the shareholders owned more then half of the company, which s unlikely in most case

4. Ego: Finally, a company may aim to increase share simply to increase their prestige and exposure to the public. Managers are human too, and like anybody they are always thinking ahead to their next job. The larger the market capitalization of a company, the more analyst coverage the company will receive.

But honestly, I think business should look at other ways to raise capital instead of getting so much pressure over the above mention issue. Try considering adding a new shareholder, or a partner.

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