BASICS OF SHARE MARKET EXPLAINED: Part 2

Let’s move on to some terms and concepts you would frequently hear with respect to the stock markets.

WHAT ARE DIVIDENDS?

As we learned earlier, a share is a portion of the company. When the company makes profits, you often receive a part of it. This is the idea behind dividends. Every year, companies distribute a small amount of profits to investors as dividends. This is the primary source of income for long-term shareholders – those who don’t sell the stock for years together.
​
WHAT IS MARKET CAPITALIZATION?

Different companies issue varied amounts of shares when they get listed. The value of one share also differs from that of another company’s stock. Market capitalization smoothens out these differences. It is the market stock price multiplied by the total number of shares held by the public. It, thus, reflects the total market value of a stock taking into consideration both the size and the price of the stock. For example, if a stock is priced at Tk. 50 per share, and there are 1,00,000 shares in the hands of public investors, then its market capitalization stands at Tk. 50,00,000.

Market capitalization matters when stacking stocks into different indices. It also decides the weight of a stock in the index. This means, bigger the company’s market value, the more its price fluctuations affect the value of the index. 

WHAT ARE SETTLEMENTS?

After you have bought or sold shares through your broker, the trade has to be settled. Meaning, the buyer has to receive his shares and the seller has to receive his money. Settlement is the process whereby payment is made by the buyers, and shares are delivered by the sellers.

A settlement implies that all trades have to be settled by the end of the day. Hence, the entire transaction – where the buyer pays for securities purchased and seller delivers the shares sold – have to be completed in a day.

In Bangladesh, we have adopted the T+2 settlements cycle. This means that a transaction conducted on Day 1 has to be settled on the Day 1 + 2 working days. This is when funds are paid and securities are transferred. Thus, 'T+2' here, refers to Today + 2 working days. Fridays and Saturdays are not considered as working days. So, if you enter into a transaction on Thursday, the trade will be settled not on Saturday, but on Monday. Even bank and exchange holidays are excluded. 

WHAT ARE BULL AND BEAR MARKETS?
Markets are often described as ‘bull’ or ‘bear’ markets. These names have been derived from the manner in which the animals attack their opponents. A bull thrusts its horns up into the air, and a bear swipes its paws down. These actions are metaphors for the movement of a market: if stock prices trend upwards, it is considered a bull market; if the trend is downwards, it is considered a bear market.

The supply and demand for securities largely determine whether the market is in the bull or bear phase. Forces like investor psychology, government involvement in the economy and changes in economic activity also drive the market up or down. These combine to make investors bid higher or lower prices for stocks.

WHAT IS MARGIN TRADING?

Many traders trade on the stock market using borrowed funds or securities. This is called margin trading. It is almost like buying securities on credit. Margin trading can lead to greater returns, but can also be very risky. While it lets you actively seize market opportunities, it also subjects you to a number of unique risks such as interest payments charged for the borrowed money. 

​WHAT DOES COST AVERAGING MEAN?

Taka-cost averaging is a concept when you buy a stock in small bunches, instead of buying in lump-sum. This helps reduce the average cost of your investment.

What is Cost Averaging By Midway Securities Ltd.?

Let us use an example. Suppose you bought 100 shares of a company costing Tk. 10 each, your total investment cost is Tk. 1000. Instead of that, if you buy 50 shares for Tk. 100 and 50 for Tk. 95, your total cost of investment would be lower. Not just that, even your average cost per share would be lower. This is called rupee-cost averaging.

This concept comes handy when a stock falls after you have bought it. The fall in share price gives you an opportunity to buy more and reduce your average cost of investment. This way, when you finally sell the shares at some time in the future, you end up making more profits

This concept comes handy when a stock falls after you have bought it. The fall in share price gives you an opportunity to buy more and reduce your average cost of investment. This way, when you finally sell the shares at some time in the future, you end up making more profits. 

WHAT ARE PRICE-TARGETS AND STOP-LOSS TARGETS?

As an investor, to maximize your profits, you need to get your pricing right – both when it comes to buying and selling. However, sometimes, prices fluctuate more than expected. So, it can become a little difficult to gauge whether to trade now or wait a little more. This is where stock recommendations help.

​Analysts put out price targets and stop-loss measures, which let you know how long you should hold a stock. A price target indicates that the price of share is unlikely to climb above the level. So, once the share price touches the target, you may look to sell it and pocket your profits. A stop loss, meanwhile, acts as a target on the lower end. It lets you know when to sell before the stock falls further and worsens your loss.