Image: iStock
You’ve probably seen market indicators on the news, waiting for your weather update. Well, giving those red and green arrows some airtime might be worth your while.
As a market place where investors trade stocks and bonds, the stock exchange plays a significant role in a country’s economy.
Ever wondered what the stock market is about? Well, it’s more than just about commodities. In fact, the performances of the stock exchange affects you more than you think.
Speaking to The Citizen, Lead Economist at KPMG, Frank Blackmore said a thriving stock market is in everyone’s best interest.
“Most people have some relation to the stock market, through direct share ownership or through savings and insurance products or even just through performance of their facilitate brands and products, and therefore it is in everyone’s interest that it performs well,” Blackmore said.
READ MORE: The ultimate guide to beginner investing in the stock market
In case you’re wondering, the stock exchange is a platform where investors buy and sell stock, including equities and bonds.
Typically, government and corporations sell stock on the market place to raise funds for projects they might not necessarily have the financial muscle to pull off, promising a return on investment.
“It allows companies to borrow from shareholders in order to invest in growth and productive initiatives. As a result, shareholders get share of the company and thereby benefit from that growth and productivity improvements through increases in the share price over time,” Blackmore explained.
Apart from fundraising, the stock market provides market-based prices on the value of each listed company, based on their financial statements and their fitness in terms of potential market opportunities. This enables potential investors to make informed decisions.
Meanwhile, shareholders who’ve invested in the stock exchange experience a wealth effect based on how the stock market is performing.
“When it’s up then shareholders will feel more wealthy and can be incentivised to spend more thereby stimulating further economic activity,” Blackmore said.
“The opposite is also true when stock market falls,” he added.
While you may not have a share in the stock exchange, paying attention to how it performs can help you gauge how well the country’s economy is doing.
“A growing stock market in terms of the number of businesses listed, and in terms of growth of the stock price, indicate a vibrant economy with potentially many opportunities for growth – where new companies are listing all the time in order to serve their customers in a new area or better than they were served before.”
Furthermore, Blackmore said the stock market’s performance signifies that conditions in a country encourage growth – with investments in infrastructure enabling this growth.
Blackmore said a stock market crash is a broad sell-off of shares on the stock market resulting in an unusually large drop in share prices across the majority of sectors listed.
“A stock market crash is usually brought about by a loss of trust in economy based on some or other specific political or economic event taking place such as the onset of a war (indicating markets will not function as they should for a while) or due to excess leverage or borrowing and concern that the borrowers(s) may not be able to service that debt (global financial crisis),” he explained.
In case you were wondering who would be allowed to trade on the stock market… Well, you can.
“Anyone can buy shares,” said Blackmore.
If you’re looking to trade in the Johannesburg Stock Exchange (JSE), you’ll have to enlist the services of an authorised broker to facilitate your transactions.
“There are a number of service providers that have an offering that is very low cost and allows investors to even invest in proportions of shares (that can be expensive), so that if you only have R20 in your account you can still buy R20 worth of that local or international share,” Blackmore explained.
When it comes to worthwhile investments, he said long-term shares were the best investment in terms of returns one can make. Furthermore, he said the shares were also an ideal investment, combating the eroding impact of inflation on your money.
“Shares are a longer-term investment, because you want to be able to wait for dips in the share price and stock market to pass and not have to sell when prices are lower and you may need the money, the compounding impact of growth and dividend payouts are also larger over longer term.
“So you will need to keep some money in a savings account or lower-yielding investment like money market to cover unforeseen emergencies, so you have the money you need when you need it and don’t have to sell your shares,” Blackmore advised.
Download our app and read this and other great stories on the move. Available for Android and iOS.
