Welcome to… the Stock Exchange.
It’s a jungle out there! Well, maybe not. But if, like me, you are thinking about investing your dollarydoos on the Australian Securities Exchange (ASX) it can be a little overwhelming knowing where to start. Let me preface this by saying I am no expert, heck I’m not even a novice! I’m just a twenty-something year old with a desire to learn about something that interests me and my future self. #LoveYourselfLater
I began at what I thought was the most logical place to start. Reading The Intelligent Investor by Warren Buffet – arguably the world’s most successful investor. But, I soon learned this book was incredibly confusing for the untrained investor, as it required a good prior understanding of markets. It ultimately left me with more questions than it answered.
Questions such as:
• Are stocks, shares, and bonds the same thing?
• What the hell is an ETF?
• I’ve grown up hearing about the NASDAQ and the Dow Jones in the nightly news, but what the franking credit do they actually mean?
Let’s start with the basics.
What is the stock exchange?
A publicly listed company is a company that has sold all or part ownership of itself to the public in different forms of stock, these stocks are traded on a stock exchange. A stock exchange is essentially an ebay for businesses.
Most countries have a stock exchange (there's more than 100). In the land of Oz, we call ours the Australian Securities Exchange (ASX). The total value of all the shares (market capitalisation) is around $1.5 trillion, with over 200 listed companies and 6.7 million shareholders.
How does a company get listed?
For a company to successfully list on a stock exchange, it must first meet a minimum set of stringent regulatory requirements. Whilst this initial hurdle can often be a barrier to entry, there are many advantages to becoming a publicly listed company.
The most important of which is the ability to raise capital by selling stocks. Access to this capital can relieve growing pains and create opportunity to invest into new ventures or development of prodpructs. It can be quite difficult for private (non-listed) companies to obtain large amounts of capital, typically it’s acquired through wealthy private investors or from larger financial institutions willing to risk an investment.
After an initial listing, a company can offer additional stocks to the market to generate further revenue through the creation and sale of new shares in the marketplace.
A company can list itself in one of two ways; via an Initial Public Offering (IPO), or through a Backdoor Listing.
1. An IPO involves a portion of stocks initially ‘floated’ (or offered) to the public to buy, which are then traded between shareholders on a stock exchange; it’s this daily trading that ultimately determines the value of a company.
2. A Backdoor Listing is where a company with intent to list sources an existing listed enterprise, and negotiates to be purchases by the listed company. The listed enterprise is generally ‘dead’ (I.e. it’s no longer trading and the share price may be at 0.00 cents!). This will then generally be followed by a change of name, board of directors and ticker (the 3-letter code that appears on the ASX).
Still with me?
What are the pros and cons of being listed?
With the benefits of being a public company there comes some drawbacks.
Let’s start with the cons:
• Company founders and/or majority shareowners have less control over the business; the company now answers to its shareholders.
• There are increased reporting and compliance requirements that are regulated by government bodies.
• Shareholders are also entitled to documentation and notifications regarding business updates and activities, and have a say in voting for certain corporate structures or major changes.
• Shareholders also have the final say when it comes to the value of the company – they can vote with their money by up-bidding the share price to a higher value or sell stocks at a level below its intrinsic value.
And for the good news:
• The benefits to shareholders is that once they own stocks, they can share in the company’s assets and profit. The more profitable a business is, the more valuable their shares become.
• Shareholders can also benefit from a company’s dividends – a dividend is a reward paid to shareholders for their investment in a company – it usually originates from the company's net profits (more on this at a later date).
Stay tuned for my next post where I explore stocks, bonds and ETFs.