It’s probably that time of your life in which people around you are speaking knowledgeably about various forms of investments and using jargon you’re very sure has dual meanings. No wonder you’re confused. This confusion is all good and well, as it can be dispelled if you continue reading.
This article will serve as a basic introduction to frequently used terms in the scope of investment and financial growth and management, stocks, stock exchanges and their impact. I will speak about the Jamaican Stock Exchange (JSE) and its intricacies in a proceeding post.

 

Introduction

The fiscal meaning of security refers to an instrument which holds monetary value and can be exchanged (fungible). This may take the form of:

  • Ownership in a company/corporation that is traded publicly (via stock)
  • Creditor relationship with a governmental body or corporation (bonds)
  • Rights to ownership (options)

Securities may be further subdivided into equity, debt and hybrid securities.

 

Stocks and the Stock Market

It would help to think of the market as a physical one. Its role is to facilitate the trade (buying and selling) of a certain commodity. So, instead of people travelling to buy tomatoes from a vendor, a transaction would be done remotely for the purchasing of, in this case, stocks. However, there are a few physical locations in some countries, such as Jamaica.

The stock market is just one of the many tools used in investing. It is an amalgam platform which facilitates the trade of stocks and other securities owned by corporations and business entities. The stock market is for companies which have made themselves public, thus accepting investment from individuals from all walks, to put it simply. The stock market is made up of a collection of exchanges, and stocks/shares are listed on a specific exchange. The stock exchange tracks the supply and demand of shares (buyers and sellers), and investors enter trades via a broker from a certified brokerage firm.

A stock may be used interchangeably with ‘share’ and ‘equity’. It represents a stake in a company’s ownership. Now, this is not to be taken literally as you will not be able to claim tangible, legitimate ownership for a company. Not to be discouraged, as purchasing stocks does grant you certain rights as a shareholder, such as dividend payments (not fixed), voting rights within the company (conditions may apply), the right to information about the company in question, etc. There are two main categories of stocks. Most investors own common stock which in terms of priority are second to preferred stock. Preferred stocks traditionally issue a fixed dividend payment, and these owners are granted first priority payments.

Broker

A stockbroker or brokers are necessary to enter trades on behalf of their clients who wish to purchase a listing on an exchange.

Stock Market

The stock market is a collective of stock exchanges within a country. The stock market brings together the aggregate investors (buyers and sellers).

Market Capitalisation

This is the total value of a company, which is the product of a company’s per-share price and the number of outstanding shares. As such, it is not an efficient way to measure the equity of a company. The market capitalisation can be influenced by individual share prices, and by stock redistribution due to the company issuing more or repurchasing stocks.

Stock Exchange

An establishment which stimulates and encourages the trade of stocks and securities.

Stock Index

A stock index measures the performance (movement) of a particular market or portfolio (group of stocks). There are copious ways in which an index may be tracked and measured, dependent on their goals. An unweighted index however, is the most straight-forward mode of measurement. In this case, all listed securities have the same impact on the index regardless of their price or volume. Other modes of measurement are based on:

  • Price (price-weighted)

This method has become less common in recent times, however it is currently                        being employed by the Dow Jones Industrial Average. With this method, each     stock listed has an impact on the index in proportion to its price-per-share. Each         share and security is assigned an equal amount of shares, therefore the higher the           price of a listing, the greater the impact. In other words, the higher a stock’s price,   the greater the influence on the index within which it is being measured;    percentage increase becomes negligible.

Disadvantages:   ignores supply and demand thus giving an inaccurate valuation                                                       of the market.

 

  • Market Capitalisation (market-cap weighted OR cap-weighted)

An index utilising this method is measuring their listed stocks and securities   based on the product of current stock/security price and outstanding shares. This      product is known as the market capitalisation. This has grown to be a widely used    technique, used by the FTSE 100, for example. As an advantage, this method            shows the actual movement of the market. The more outstanding shares recorded from a listing is highly indicative of a large company. As such, it will reasonably have more impact on its overall containing market.

Disadvantage:    In some cases, outstanding shares do not represent available                                                                        shares, and thus become misleading for the market capitalisation                                                     calculation, and so forth.

 

  • Risk (risk-weighted)

All securities are assessed for risk. Those considered to be less volatile (liable to        change quickly;rate of fluctuation) are assigned a greater weight and as such, are           more influential on the index’s overall performance.

  • Financial health and prognosis (fundamentally-weighted)

Metrics such as sales, profits, dividends, cash flow, etc. are all assessed in order         to assess an entity’s financial health. This is in an effort to get a better     intrinsic perspective. One specified example of this approach is the            revenue-weighted method.It offers a more accurate indicator of value, as revenue is (theoretically) not easily manipulated.

 

Initial Public Offering

An initial public offering, or IPO refers to the first time a company makes a call for investors.

Prospectus:

This is a legal document required ahead of time, prior to a company officially issuing invitations via an IPO. This document is for the investor, allowing them to garner a holistic picture of their prospective investment. As such, it should provide detailed information about the company in question, including but not limited to an extensive background and history of the company, financial standing, and the purpose for asking for investors (how the funds will be allocated when received). The document should be approved by the necessary boards before being made public.

 

Exploring the relationship between stock market performance and the economy

The stock market is influenced by a range of factors, including politics both local and international, internal affairs of businesses and of course, economic news. These cumulatively will heavily impact an index, but in the case of individual stocks, the influence is primarily based on the state of the company.

An increase in financial literacy and low interest rates being issued by the bank has resulted in an increase in investing based equity within Jamaica. The World Bank has proposed on more than one occasions that developing countries should establish and promote the stock market. Financial markets may have either a bank-based archetype or a market-based archetype. It is empirically believed that a country’s rate of economic growth is positively associated with finances. Additionally, the economy of a country is seen to respond more strongly to a market-based model, such as the stock market which is thought to be a poignant tool as it relates to developing a competitively secure economy. A market-based model such as the stock market is thought to be more flexible than its bank-based counterpart. As such, it is able to withstand unforeseen and inevitable mishaps and fluctuations be it as a result of improper trade agreements of a lack of confidence from investors.

Bloomberg, the internationally renowned media company has highlighted Jamaica as having the best stock market globally, a feat which has been attributed to its size and solely local trading (there are no Jamaican stocks being traded internationally), in conjunction with Kingston having been restructured as the financial hub of the country. This news is welcomed on the heels of the World Bank declaring Jamaica one of the top six places to start a business, leading developed nations such as Australia, United Kingdom and the USA. Given the reputation which precedes the country as one of the most violent in the world, it would bode well to assess this positive paradox.

2018 saw the Jamaican Stock Exchange (JSE) gain 29% in dollar value which is particularly noteworthy as the year was generally assessed as one of the worst for global stock markets, with most indexes reporting drastic declines. The past five years saw a groundbreaking rally of 233% for the local exchange, as opposed to 83% from

Unconventionally, the JSE is only traded 3.5 hours (9:30 am - 1:00 pm) each weekday. Yet another fact which piques one’s interest at the unwitting performance of the exchange. It can be said that the Jamaican stock market is doing what it set out to do and very efficiently. Mobilising funds, allowing for the ease of borrowing, lending and owner transference. This enables disparate industries to assist each other, thus resulting in overall economic growth for the country.

Evidently, it bodes well to gain more knowledge about the financial market. Not only has it been theorised, but the last five years within Jamaica have confirmed a positive link between the stock market and economic growth. Brokerage accounts have increased from 5% of the populous to 10%. It will be interesting to watch the growth this year, especially now that we have a greater understanding of the ripple effect.

 

Thank you for reading. Please remember to subscribe to our website to stay abreast of the latest articles.

 

 

Writing Credit: Ashley Belinfante

 

Neither caribbeanlinkz.com nor our writers provide tax, investment, or financial services and advice. The information above is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor, for the purpose of general knowledge. Past performance is not indicative of future results. Investing will always involve a risk including the possible loss of principal. Seek a professional financial advisor for how to proceed.

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