Times are changing fast and more and more people are coming to realize the importance of investing for their future. Many Papua New Guineans are coming to realize that through investing some of their money, they can look forward to a comfortable retirement.
However, the myths about stock market are still deeply ingrained in the mindset of the general public. Many have come to accept that investing in shares is something only the already rich and people with super dooper mathematical IQ and financial genius can do.
I was in that same boat with all of the other people until I found a good mentor that forced me to unlearn that myth. As a matter of fact, investing in shares is something that just about anybody can do as long as they know how to do it right.
In this post, dedicated especially to PNG readers, I wish to briefly show you how the whole business of stock market works. This may just be the most important and very easy to understand article describing the how the stock market thing works. You must understand this to have a bigger picture of the process. Print it and study it if you have to.
How Stock market works
If you’d like to buy a share of stock in any publicly traded company you’ll most likely need the services of a brokerage firm. Though it’s possible to buy and sell shares of stock on your own, there are some practical and legal problems with this approach. The securities industry is highly regulated, so you can’t just hang a shingle and start selling stocks to the general public, unless you’re properly registered and licensed.
When you want to buy groceries, you go to the grocery store. When you want to buy a sofa, you go the furniture store. And when you want to buy stocks, you need to do business with a brokerage firm. A brokerage firm is a dealer of stocks and other securities that acts as your agent when you want to buy or sell stocks. In PNG, we only have Kina Securities and BSP Capital.
Most trading of stocks happens on a stock exchange. These are special markets where buyers and sellers are brought together to buy and sell stocks. In PNG, we have just one single exchange call Port Moresby Stock Exchange (POMSoX). The POMSoX is a very small exchange with about 21 publicly listed companies where you can invest in.
From the perspective of an investor, buying and selling stocks seems pretty simple. If you use a full-service broker, just call her up on the phone and place an order for 100 shares of Bank South Pacific (BSP).
Within a few minutes, or days (PNG) you’ll receive a confirmation that your order has been completed, and you’ll be the proud new owner of BSP. Same can be done for any other company listed at POMSoX.
Behind the scenes, however, there’s a lot of action that takes place between your order and the confirmation. Here’s what has to happen:
- You place the order with your broker to buy 100 shares of the BSP Company.
- The broker sends the order to the firm’s order department.
- The order department sends the order to the firm’s clerk who works at POMSoX where BSP stocks are traded
- The clerk gives the order to the firm’s trader, who also works on the exchange
- The trader goes to the specialist’s post for BSP and finds another trader who is willing to sell shares of BSP
- The traders agree on a price.
- The order is executed.
- The trader reports the trade to the clerk and the order department.
- The order department confirms the order with the broker.
- The broker confirms the trade with you.
Your stock broker and you
On the flip side of the coin, buying a share works just the same. Your broker is just a middle man or effectively a salesman, who gets paid commission to for transactions that she or he helps execute. That means you can’t always rely on your brokers advice. You must do your own research so that you are in same wavelength when your broker explains something to you. You also want to be a responsible investor by making logical decisions based on sound business fundamentals. That is why you need to get educated on stock market.
That’s how a traditional stock exchange works, but much of the action that takes place when you buy or sell a stock is being handled with the assistance of computers. Even if you bought a stock that trades on a stock exchange, your order may be executed with little or no intervention by humans. You can log on to a brokerage firm’s Website, enter an order, have the trade be executed, and receive a confirmation all within sixty seconds or less.
Register for my short session: Shares 101: Beginners Guide to Investing in Shares to learn how to start investing in shares