Understanding The Stock Market

The stock market is where the shares in companies are bought and sold, providing companies options to access capital, and investors opportunities to own a share of the company and enjoy potential gains from the company’s future performance.

The stock market offers people the ability to generate a separate income stream apart from their daily jobs, or income streams which are superior to those from traditional savings deposits. But before you even think about buying and selling shares, you must know the fundamentals of the stock market and of trading.

First time investors can become confused because of the terminology that is used to describe various market functions. These don’t take long to learn. Click here for your basic share trading terms. Incidentally, one common confusion is over the terms ‘stocks’ and ‘shares’. Actually, they both mean the same thing and can be used interchangeably.

The Role of Bursa Malaysia

You can only invest in stocks through a stock exchange, an organized marketplace where stocks are bought and sold under strict rules, regulations and guidelines. The Malaysian stock exchange is called Bursa Malaysia. Bursa Malaysia has over 1,000 listed companies offering a wide range of investment choices to local and global investors. Companies are either listed on Bursa Malaysia Securities Main Board for larger capitalised companies, the Second Board for medium sized companies or the MESDAQ Market for high growth and technology companies.

Raising Capital on the Stock Market

The Stock Market was created by companies wishing to raise capital for their business. When someone says they have a listed company they mean listed on Bursa Malaysia. All companies need cash to take advantage of growth opportunities. Many start-up companies however find themselves short of capital to fund expansion. One way to acquire this cash is to publicly float the company. This involves selling part of the company to private individual and institutional investors who are then able to freely exchange these stocks on an open market. Purchasing stocks in a company that is listed on the stock market is done through an Initial Public Offering or IPO.

Once an IPO has been issued, you can contact the company (phone, fax or email) for a copy of the Prospectus and complete the application to apply for an allocation of shares. Or you can wait until the company is floated and buy shares on the open market. Besides Bursa Malaysia, stock brokers will also have information regarding Initial Public Offerings.

Companies that are already listed can also raise additional money on the stock market by offering existing stockholders the opportunity to buy more stocks in the company. For example, a listed company wanting to raise additional capital might issue one new share at 5sen each for every three shares an existing investor owns.

When you buy shares, you are buying a share in that company and so you own a percentage of that company. When the company makes a profit, you share in that profit in the form of a dividend. Typically, the number of shares that have been issued multiplied by the share price gives us how much a company is worth.