Personal Financial Adviser with Oran Hall
What is a loser and a winner, as seen on ‘Business Day’, and how does trading of stocks work? Is it done on a floor room or through the stock market?
When financial reports refer to stocks as winners and losers, they are referring to changes in their prices relative to a previous period, often the previous trading day. The stock exchange is the primary facility for the trading of stocks but it also facilitates trading in other securities, and although it is often used interchangeably with stock market, the two are not the same.
Some market reports refer to stocks advancing or declining, which effectively is saying that they are winners or losers. That is not to say, though, that the losers are no-good stocks and that winners are great stocks. In the course of trading, stock prices rise and fall. The price of a solid stock may fall after it has risen significantly over several trading days, weeks or months. In such a scenario, prices tend to fall as stockholders sell to realise their paper profits. Stock prices may also fall if the market weakens due to several factors, such as a poor outlook for the economy.
A strong market performance overall may cause the price of a relatively weak stock to increase so, as an investor, you should know what you are doing when investing in stocks. Generally, it is safe to say that, over the long term, the stock prices of companies that make good profits will increase. Generally, the stock prices of companies that do not do well will either fall or generally lag the prices of better stocks.
The stock market refers to the organised trading of stocks and other securities, such as preference shares and bonds which are listed on the stock exchange. Trading may take place on the stock exchange or by electronic means. The stock market also includes the over-the-counter market – the trading of securities that are not listed on a stock exchange. In our Jamaican context, the Jamaica Stock Exchange and the Junior Stock Exchange are important elements of the Jamaican stock market. The stock exchange is thus an integral part of the stock market.
So what is the stock exchange? It is a company or organisation that facilitates and promotes the trading of stocks and other securities listed on it. The Jamaica Stock Exchange is a public limited liability company that has its own board of directors who set policy and oversees its operations. Like any other business, it exists to make a profit for its owners. The Jamaica Stock Exchange Limited is actually listed on the Jamaica Stock Exchange.
Stock exchanges facilitate stock-market activity through their listing services. They list companies that meet their requirements so that buyers and sellers can come together to trade in their securities. Their strict regulations serve to protect investors and they have facilities to allow the public to follow prices, sales data and other important market information, thereby helping them to make informed decisions. The Jamaica Stock Exchange has a subsidiary, the Jamaica Central Securities Depository, which is a facility for holding securities and which enables share transactions to be processed by book entry. As this allows for electronic transfer of securities, there is no need for physical certificates.
The stock exchange itself does not generally own, buy, or sell any of the securities that are bought or sold. Securities are owned by the shareholders who may be individuals, companies, pension funds, or stockbrokers.
To buy or sell stock on the stock exchange, you should go to any of the stockbroker firms authorised to trade on the exchange. Stockbrokers are able to advise you to help you make suitable decisions, but you must open an account before you can transact business with them.
Transactions are done on a cash basis, that is, you are required to pay in cash or by cheque for the stock you purchase. You must have clear ownership of any stock you are selling.
The Jamaica Stock Exchange has had an electronic trading platform since January 2000, so brokers do not physically have to go to the floor of the stock exchange to trade for their clients, themselves, or their companies.
Once you have chosen the stock you want to purchase, you will indicate how many units you want, and the price you are willing to pay. You may place a market order, which specifies the number of shares you want to buy or sell at the best available price. Other types of orders include limit orders and date orders. The stock exchange also has rules relating to payment for securities bought and sold.
The trading of listed stock in the Jamaican stock market no longer takes place on the trading floor of the Jamaica Stock Exchange but on an electronic platform. I hope you will select top performers when you make the move to invest in stocks.
Oran A. Hall, a member of the Caribbean Financial Planning Association and principal author of ‘The Handbook of Personal Financial Planning’, offers free personal financial advice and counsel. Email [email protected]
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