How Come My Dad Never Traded Stocks?

It is shocking to realise how clueless I have been for a really long time, and I am mostly not alone on this one.

I remember studying about the stock exchange market in secondary school and at university, though on a purely theoretical level.

The strangest of all is that, despite being into accounting and finance for so many years, I never got exposed to the realities of the “famous” stock exchange. I simply never traded stocks or knew anyone who did, certainly not any member of my family or friends!

This puts in question the teaching approach in most African countries. I can’t fathom the idea of commercial students not exposed to the practical aspects of the stock market, or whatever is being taught in class for that matter.

We learn about financial statements and how companies operate, but never really get the chance to witness it in practice. This needs to be addressed as a matter of urgency, and the status quo needs to be reviewed thoroughly.

What is a stock?

As defined by Forbes, “Stocks are units of ownership in a company, also known as shares of stock or equities. When you buy a share of stock, you’re purchasing a partial ownership stake in a company, entitling you to certain benefits.”

If Facebook had 10,000 shares and you bought 1 share, this will make you an owner of 1/10,000^th of Facebook.

If you bought 1 Facebook share at $50, as the value of Facebook increases, so does your share price.

What’s the Stock Market?

According to Investopedia, “The stock market refers to the collection of markets and exchanges where the issuing and trading of equities or stocks of publicly held companies, bonds, and other classes of securities take place.” This is the definition I was taught in school, however, it can simply be referred to as a market where buyers and sellers of financial products meet.

Before relocating from Africa to Europe, I knew about the Douala Stock Exchange market in Cameroon. I remember seeing the share prices of traded companies, displayed on an electronic billboard on their building every morning as I drove to my place of work. That’s the most information I had at the time. Obviously, those who had a more extensive knowledge were buying shares and growing wealth, as I went about my day to day life in complete ignorance. It beats my imagination, how ignorant I was!

I am by no means a trading expert, but the dynamics of stock trading are very exciting.

Why do companies even sell shares?

When companies launch an initial public offering (IPO), they invite people from the general public who are interested in owning part of their business to buy into the company through owning shares. The main aim of IPOs is often to raise operating capital quickly, and enrich the early investors. The value of a company is often based on its potential earnings in the future.

One thing I noticed as a new trader is that, I was more enticed into buying a stock that had been projected as a “strong buy” by wall-street analysts. These analysts study companies by looking at their financial statements, interviewing their top executives, following their operations, and a whole lot of dynamics. They then rate it a “strong buy”, a “hold” or a “sell”.

Having said that, it would be wrong to omit the fact that highly paid research analysts who are expected to be pretty accurate had up to an 81% failure rate in predicting stock prices. I remember buying shares of a company at $1.5/share, which had a price target of $5 within 12 months. To my greatest surprise, the stock price fell down to $0.045 within 3 months and like a horror movie, I watched my invested funds shrink. The good news is that you only loose money on the stock market when you sell a share cheaper than the price at which you bought it.

The Dynamics of a stock price

Stock prices are driven by the forces of demand and supply. When more people buy the shares of a particular company, the price goes up and the opposite is true. This isn’t about 100 or 200 trades here and there, rather, the prices are influenced by millions of transactions every second.

Now that you know all the information above, the million dollar question is; how do I start investing?

3 main steps to start Investing.

Open a Trading Account with a reputable broker in your country of residence.
Have a look at your cashflow, make sure all your liabilities and bills are covered. If you have any surplus cash, deposit this amount into your brokerage account. Stock price ranges from pennies to thousands of dollars.
Carry out research and invest in productive companies.

There’s a popular saying in stock investing which goes “only invest money that you are comfortable loosing.” Carrying out research on a company that you want to buy into is good, but at the end of the day there’s always an element of risk involved.

For those who want to start investing in Africa, there are 29 stock exchanges in Africa, representing 38 nations’ capital markets.