The stock and what you need to know about it!
What is a stock?
A share is a security with no maturity. This is thus a very formal definition, let’s expand on its meaning a bit.
For the operation of a company, equity is given by the owners, from which the company buys the assets necessary for its operation. Initially, of course, only those who are founding members will add anything (capital, assets, etc). Everyone will own the company in proportion to the capital provided, just as if you were to buy a property with your family members. The ownership share is determined based on the amount submitted.
This capital is not given as a loan, but will be owned by the company, which the company will receive permanently. In the normal course of business, this money is not returned to the owner by the company, but instead he receives rights and ownership. If you rather need the money, you can sell your stake to anyone, even the business that is about ownership.
And the stock was born…
As the company grows, they may need a larger amount of capital that the previous owners can no longer make available to the company. This is when new investors are attracted.
As the law stipulates that it is prohibited to collect the shareholders and share capital of a public limited company by public invitation during the establishment of a public limited company, a private limited company is established for the first time. Its securities cannot yet be bought by anyone, but it can be converted into a publicly traded one whose shares can already be traded on the stock exchange.
To make it easy to determine someone’s share, the company is cut into equal parts on paper. The value of these shares will be the nominal value of the share. Thus, the share capital of a joint stock company is nothing more than the product of the nominal value and the number of shares.
By purchasing a share, you become the owner of that company in the same proportion as your paid-up capital, just as the founding members were owners in that proportion. Because the stock has no expiration date, there is no pre-determined time to get your money back.
You definitely need to know this about stocks
Currently, the registration of shares in Hungary is performed by Keler Zrt. They guarantee that the transfer of ownership can be traced during stock exchange trading.
As already mentioned, the share has a nominal value. This is recorded at the time of issue. However, the share price may deviate from it in any direction. The price is the price you pay if you want to buy that stock. The only connection between the two is that it is about the same company. You can easily buy a share with a nominal value of HUF 100 for HUF 10,000.
Equity is determined based on face value, and you pay the exchange rate for it. So you might already understand why there is no guarantee behind it.
Obviously, it is no accident that investors pay for the stock at a higher price. Because of the rights attached to them, they can still do well.
Main rights of shareholders
Attendance at a general meeting
The first and perhaps most important right is that you can influence the operation of a company based on your ownership. To do this, let’s say you need to invest a significant amount of money in a particular company, but it’s not impossible. At the general meeting, your vote will be taken into account in proportion to your shares, so it may even be the case that at voting thousands of shareholders will have less weight against your opinion alone.
Right to dividends
The company distributes a portion of the profits generated, from which you can benefit in proportion to your shares. You are entitled to a dividend if you already own the shares at a certain time. This generally ends in the 1 week prior to the dividend payment.
Dividend payment is an option for the company, not an obligation. This way, the company can also choose not to pay any dividends at all in that year.
Right to transfer
Since stock is a marketable security, you can choose to get rid of it at any time. You can do this at the current exchange rate, which is influenced by supply and demand. It can also mean for you to sell more expensive than you bought (i.e. you win with it), but with a less thoughtful move, you can also incur a loss.
Right of inspection
If it does not violate a trade secret, you can get information about how the company works.
Types of shares
Before we get into what to look for when buying a security, let’s look at the types of stocks. In addition to the fundamental rights listed above, some of these are accompanied by additional rights.
With this type of stock, you can get one or more of something for the first time. Such rights may include:
- dividend preference: entitles to a more favorable dividend payment
- priority of votes: at a general meeting, your vote is taken into account to a multiple extent, or you may have a right of veto.
- liquidation priority: in the event of the dissolution of the joint stock company, it receives money after the creditors but before the other shareholders (so it is more likely to receive it)
Limited transferable share type. It serves to motivate employees because in addition to their salary, they also receive money for the results of their own work.
This security is issued as a bond (i.e., a debt security), but its owner may choose not to charge interest and principal at maturity, but rather the ownership interest and subsequent dividends.
It entitles you to a pre-determined amount of interest in addition to the dividend. Interest is due to the owner even if the company does not pay dividends in that year.
As the share is transferable without restriction, the company may also decide to repurchase its own shares. This obviously does not involve voting rights and is subject to strict rules.
The basic type of stocks, on stock exchanges you can typically find this. The fundamental rights of shareholders are attached to it.
If you decide to invest in stocks, you can basically come across the common stock. There is also a difference between these, as they do not have the same circumstances and attitudes towards different markets.
Difference between companies issuing ordinary shares
As these individually cover a large area, we will now only look at the difference between the ordinary shares.
If you look at the prices of the two companies below, you can see that although they offered common stock for sale in the same way, they still took a completely different path. What they have in common is that both can show significant fluctuations in the short run, but in the long run they have a much higher return outlook compared to normal commitments.
They may not pay dividends at all, or if they do pay, may not pay much. You benefit from the fact that the business is showing significant growth, so the price of its shares can also be sold at a profit. Such can be e.g. technology companies that are going through significant growth.
Stable companies with large markets. You can no longer expect further significant growth precisely because of their size, so the price of their shares is relatively stable. They can also pay significant dividends, in part because of their size advantage.
A good example of this type is Procter & Gamble. People are used to washing, brushing their teeth, etc., even in times of crisis, so large crowds buy their products.
If you also choose the type, don’t just base it on dividends for a single year. Review how much dividend you have paid in the past and draw conclusions from it.
Meaning: Initial Public Offering.
It is the first share issue, listed on a stock exchange.
Securities of companies you haven’t been able to buy through the stock market before.
There are risks involved, after all, new areas are being opened up. If you choose to do so, review your company’s past performance as well as past management performance.
Now that we’ve reviewed stocks, let’s look at how you can invest and build your own stock portfolio for yourself.
Investing in shares
Yields on stocks can be higher in the long run than, say, a bank bond or government security.
You can use stocks in your own investment portfolio:
- on a permanent basis: because of their dividend payment, you can have a stable source of income regardless of their exchange rate.
- cyclical: the market has cycles, so at the beginning you buy it, sell it after an exchange rate increase
- “Try it out”: you can invest money in stocks with a high return but also a high level of risk that you can afford to risk
If you decide to invest in stocks, you can do so in different ways.
By buying individual shares
Keep in mind that diversification will increase your security. If you are investing in individual stocks, you should also build a properly diversified portfolio. That is, do not invest your existing capital in only one direction, even if it promises a high return prospect.
Through actively managed mutual funds that invest in equities
In this case, diversification can be considered solved by using a single mutual fund, but you can even direct your money to the investment units of several investment funds.
As you can see in the picture, you can still achieve beautiful results.
Following a pre-determined logic, an index tracking fund invests your money in a passive way. Copies a stock index in a specific way. By using a stock ETF, you can copy the performance of the stock market without having to sit next to it on a daily basis.
Since long-term investing, day trading, and speculation are three different things, let’s now look at what are the ones that affect the price of a stock in the long run.
Factors influencing the share price
High sales are not necessarily equal to high profits, in any case a good omen. After the end of a successful year, there is a greater chance of increased dividend payments, expansion and maintaining stability.
This is a double-edged sword. Obviously, a merger represents a greater market power, from which there may be shaky stages even in the early stages, but even a series of legal issues may arise.
It is typically a good reason for a company to buy back its own papers. Whatever it is, the reduced number of units in circulation will significantly distort the amount of dividend paid per share, and this could distract many people.
Significant dividend payments
Dividend payments “reward” investors on the one hand and also show stability on the other. But there is so much less left for next year.
Introducing a new product
A new product always comes at a significant cost and it is far from certain that the market will buy for it. Shareholders also know this and are either scared or see an opportunity in the product.
This is nothing more than when the number of existing shares is doubled, and at the same time the price is halved. This will keep the same value in your property, only lower the sale price, thus increasing the marketability of the stock.
Just like any other business, a corporation does not pay a bonus just like that. Obviously, a significant result must be achieved for the bonus to be decided by the general meeting, but the effect is the same as that of a dividend payment.
What to look for before buying a stock?
Before you invest in stocks, it you must know what results you can expect from that particular security. After all, as you’ve seen, there can be a serious difference between stock and stock.
This article is now not about technical or any other analysis of stocks and is not about investment advice. If you are more interested in the topic, please contact us, then a staff member with the necessary qualifications for this activity will be able to help you.
If you want to start on your own on this topic, there are a few questions you should definitely review before you get into it. These issues are also reviewed by private bank investment managers (they review it in more detail, however). I suggest you copy those who are already in front of you. To get you started, review these 10 questions.
Since there is no investment that is completely risk-free, let’s look at the key risks associated with equities.
Because a stock is a security of ownership, it is worth as much as a business. Let’s say the chances of the complete annihilation caused by World War II happening again are very minimal. At that time, the value of all German and Hungarian listed shares became 0. However, in the event of termination without a successor, you may find yourself in a situation where you get nothing.
Exchange rate risk
Because you give or buy shares at the current daily price, you have no control over them (unless you are a big business insider). There is no such thing as a good or bad exchange rate, just one that is more suitable for buying or more for selling. Your risk in this regard is that if you misjudge which stock to buy, you could even lose out on the transaction. You may be stuck inside for a long time because you don’t want to sell at a lower price.
The effect of mass spirit
Even a group of the wisest people can turn into a flock of sheep and show irrational behavior.
Many people make the mistake of buying securities that are already heavily overvalued. Just because everyone is still buying or just selling the stock bought for holding, just because everyone is selling.
Before you make a decision, either ask for expert help or be careful. Remember Warren Buffet’s attitude:
“To make a profit in the stock market, be greedy when others are afraid and be afraid when others are greedy”.
- Do you think in individual stocks or rather in mutual funds? Why did you choose that?
- What are the main points that are important to you when deciding on an investment (even a stock)?
- How do you manage the risk posed by equities yourself?
The world of stocks is complex, so a single article cannot cover the entire area. If you are interested in how you can profit from the shares, contact us.