Equity markets offer investors a unique opportunity to own a part of companies like Ethio Telecom or Ethiopian Airlines by purchasing stocks. Stocks represent a portion of ownership, and equity markets are where these shares are traded. Whether you’re investing for the long term or looking for short-term gains, understanding how stocks are bought and sold is essential. Let’s dive into the basics of equity markets and explore how the buying and selling process works.
What Are Stocks?
A stock, also known as equity, represents ownership in a company. Stocks are divided into shares, and each share entitles the holder to a proportion of the company’s assets and profits. When you buy a share, you effectively own a small part of that company. Companies issue shares to raise capital for growth, expansion, or debt repayment. In return, shareholders can benefit financially if the company succeeds.
There are two primary ways to earn profits from stocks:
- Dividends: Companies distribute part of their profits to shareholders as dividends.
- Capital Gains: When stock prices rise, shareholders can sell at a higher price, making a profit on their investment.
Equity markets like the New York Stock Exchange (NYSE) and NASDAQ facilitate the trading of these stocks. For example, these major exchanges see over 40 to 60 trades per second, offering liquidity and accessibility to investors worldwide.
In Ethiopia, equity markets are set to undergo significant changes with the anticipated launch of the Ethiopian Securities Exchange (ESX). Recently, Ethio Telecom made headlines by initiating its Initial Public Offering (IPO), offering a 10% stake to the public. This development could pave the way for a thriving capital market, fostering inclusivity, transparency, and economic growth.
Types of Stocks: Common and Preferred
Understanding the main types of stocks is crucial for informed investment decisions. Here’s a quick overview of the two primary categories:
Common Stocks
Most investors are familiar with common stocks. When you buy common shares, you gain voting rights in company decisions, such as electing board members. Common stockholders may also receive dividends, but these payments are not guaranteed and depend on the company’s profitability and the board’s decision. Common stocks offer higher growth potential but come with greater risk due to market volatility.
Preferred Stocks
Preferred stocks offer a fixed dividend, which is typically paid out before dividends to common shareholders, making them appealing to income-focused investors. Preferred stockholders generally do not have voting rights, meaning they have less influence over company decisions. While preferred stocks provide a lower risk and steady income, their growth potential is usually less than common stocks.
In summary:
- Common stocks offer higher growth potential and voting rights but come with more risk.
- Preferred stocks provide fixed dividends and lower risk, appealing to conservative investors.
How to Buy and Sell Stocks
Buying and selling stocks involves four key steps. Here’s a breakdown:
1. Open a Brokerage Account
To purchase stocks, you’ll need an account with a brokerage firm. These firms facilitate stock purchases on your behalf. You can choose between traditional brokers or online brokers, which generally offer lower fees. After setting up an account, deposit funds to start trading.
2. Choose Your Stock
Choosing the right stock requires research and analysis. As Warren Buffet wisely advises, “never invest in something you don’t fully understand.” Look through a company’s financial statements, such as balance sheets, to evaluate its growth potential and financial health. Answer basic questions like, “Is this company growing?”
3. Place an Order
Once you’ve chosen a stock, it’s time to place an order. There are two main types:
- Market Order: Buy or sell stocks at the current market price.
- Limit Order: Set a specific price at which you are willing to buy or sell the stock.
You can purchase stocks using cash or reinvest dividends to buy more shares over time.
4. Execution and Settlement
After placing your order, the stock exchange matches buyers and sellers. Once the trade is executed, a process called settlement occurs, where the stock ownership transfers to the buyer. This process typically happens almost instantly on major exchanges.
Why Understanding Equity Markets Matters
Equity markets are essential for companies seeking capital and investors looking to grow their wealth. A solid understanding of how stocks are bought and sold and the factors influencing stock prices can empower investors to make better, more informed decisions. While the stock market does involve risk, it also provides an opportunity for investors who approach it strategically and mindfully.
By: Yeabsira Lakew
