Thursday, January 11, 2018

Basics of investing in stock market that one should know


By Moremi Marwa

Let us start the New Year, 2018 by going back to the basics: what does owning shares mean, what is a share, who can issue shares, who can invest in share, etc.

Owning shares

Wouldn’t you love to be a business owner without ever having to show up at work in the company to which you have invested? Imagine if you could just be sitting back, watch your company grow, and collect the dividend cheques as the money rolls in! and in case of liquidity challenges and you real need money, you can just look into the TV or reading a newspaper, get the value of your investment based on the indicative market price, call a broker, place a sale order and there you are – have the money you really needed. This situation might sound like a dream, but it’s closer to reality than you might think.

This is what owning shares in the company listed in the stock exchange is all about.

When you start on your road to financial freedom (some say to measure your financial freedom you take your current annual income multiply by the number of years to retirement), you need to have a solid understanding of shares and how they trade on the stock market – commonly known as the stock exchange – such as the Dar es Salaam Stock Exchange.

Over the last few decades, the average person’s interest in the share market has grown exponentially. Shares are now widely considered as the vehicle for growing peoples’ wealth and a sustainable tool of income earning. We might somehow have come across a story of one real rich man called Warren Buffet of Omaha, Nebraska in the United States of America, who, together with his partners, have made significant amount of wealth through investing in shares via a company called Berkshire Hathaway Inc.

Despite listed shares popularity, however, most people in our society don’t fully understand or appreciate the concept of shares and it can be a means to enhance one’s income and wealth without necessarily have to invest time and such related resources working in the company to which you have invested into, if the economy is not doing so well or the company is mismanaged, shares can be a cause of poverty and financial distress. That’s why you have probably heard comments from relatives and friends with either says: “So and so auntie made a killing in DSE shares recently, and now she’s got another hot tip...” or “Watch out with shares-you can lose everything in a matter of days!....” So much of this misinformation is based on a get-rich-quick speculative mentality. This being the case, there are some misinformed people within our societies who sometimes make us think that shares are either the magic answer to instant wealth with no risk or that investing in shares is like gaming and gambling.

Shares can (and do) create massive amounts of wealth, but they aren’t without risks. The key to protecting yourself in the share market is to understand where you are putting your money. It is for this reason that we have initiated and embarked in these thought leadership initiatives on matters related to investing in securities that are listed in the stock markets i.e. shares, bonds, etc to provide the foundation you need in order to make investment decisions yourself in an informed fashion. Yes, you might need to seek investment and financial advice from more sophisticated and trained individuals, but you will have the basics.

So, what is a share?

A good place to start on your basic investment knowledge journey is to understand what a share is, different types of shares and the share market. So let’s begin at the beginning with a basic understanding of what shares are. Plain and simple, shares represent ownership of a company. A share represents a claim on the company’s assets and earnings. As you acquire more shares, your ownership stake in the company becomes greater. Whether you say shares, stocks, equity, it all means the same thing.

By buying a share, money, which could have been idle or otherwise, held in low interest earning savings in banks and other financial institutions and instruments moves to a more productive economic activity.