Among other reasons, a lot of women shy away from investing, because they cannot figure out the market, its products, and the processes. Many still leave money issues to their partners, husbands or finance consultants. But since often the lack of comprehension comes with skepticism and fear of a stock market crash like the one in 2008, lots of women won’t neither trust their investment advisors for real. This way, they end up in a dilemma that offers one sole way out: women need to understand finances.
With this blog, FinMarie strives to not only make financial literacy for women accessible, but also make it easily understandable and contribute to strengthen the movement that keeps pushing on with financial competence for women. That’s why with today’s post we want to help you understand stocks.
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Understand Stocks With This Example
Imagine you want to start your own business, let’s say a restaurant. For doing so, you need 100,000 Euros, but you have only 10,000 available.
So, in order to collect the necessary amount, you decide to ask friends and family, if they wanted to participate. If nine friends of yours threw in another 10,000 Euros each, every one of you holds the same share in the business.
The total of all your ten shares equate to the restaurant’s total value, i.e. the 100,000 Euros.
Some years into your running the business it has gained in popularity and evolved to being the city’s go-to place. By now, its aggregate value amounts to a million Euros. That’s ten times the initial value.
This means, that you and your friends each now own a share worth 100,000 Euros, instead of the initial 10,000. These shares are what stocks at the capital market are.
Financial Literacy For Women: What Are Stocks?
Stocks are securities that represent a part of the businesses capital. Basically, by offering stocks, enterprises sell shares of their own company. If you invest in stocks, you become somewhat of an associate. A shareholder, in investing terms.
For businesses, stocks are a way to receive money that they can use to finance trades and acquisitions, production, research, and purchases. Always focussing on expanding their affairs and activities without making any debt.
All stocks summed up and multiplied by their market price reveal the current enterprise value — i.e. the 100,000 Euros in our example above.
The development of a stock’s value depends on how well the business that offers these shares is administered. If your restaurant above were maladministered and you had made any profit, maybe your and your friends’ shares would have been worth only 5,000 Euros each after some years. You would have, hence, sustained a loss.
So, stocks are a way to buy a share in an enterprise. Once you own such shares, you have two different types of rights: property claims and administrative claims.
Property claims: This means that, if the enterprise makes a profit, you’re entitled to a part of said profit. Due to the increase in the enterprise value, the shares, too, increase in value. This way, you gain from your listed stocks.
Administrative claims: These give you the right to participate in business affairs. For instance, you could propose candidates for the company’s administrative board.
Which rights you’re entitled to precisely as a stockholder depends on the type of stock you buy. There are several types of stocks providing different rights and claims for investors.
Financial Competence For Women: Types Of Stocks
Not all stocks are the same and, hence, they don’t come with the same property or administrative rights. It’s the enterprise to decide which claims you’re entitled to as a stockholder, since it’s up to the company to determine the characteristics of its stocks. The two most common types of stocks are:
- ordinary shares which represent pretty much the most classical type of stocks. These stocks do not hold any sort of special right, such as at the distribution of dividends or when worst comes to worst, at the liquidation of a failed venture. You do, however, have a chartered voting right that you can exercise at the company’s general meetings.
- preference shares give you a priority right when it comes to the distribution and / or a possible refund of the enterprise’s capital in case of bankruptcy. In addition, if you own preference shares, you usually benefit from higher dividends. However, you do not have voting rights in business issues. Theoretically preference shares can be converted into ordinary shares, but this is up to the company. Listed businesses prefer selling ordinary shares, because this way, they receive investor’s funds without having to admit to voting rights in exchange.
Furthermore, there are so-called nominal value shares and registered shares available. But knowing the two above-mentioned types of stocks suffices for some basic financial competence for women. If you want to dive deeper into the matter, feel free to talk to our financial advisors and sound out your possibilities to invest at the stock market:
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Understand Stocks First, Then Buy Them
The stock market’s primary objective is to communicate and match the enterprises’ capital demand and the stockholders’ and investors’ capital supply.
You can buy stocks at the primary market and the secondary market.
The primary market trades stocks that are on offer for the first time. These are mostly shares from companies that have just gone public. Whenever talk is about initial public offerings, it refers to the primary market. Stocks and shares of long listed businesses are traded between investors at the secondary market.
Supply and demand dictate the price development of securities over time. If there’s high demand, i.e. high interest on the part of investors in a business share, the price increases. If demand is low, it decreases.
Financial Competence For Women: The Risk Of Stocks
Stocks are risky. Riskier than some other investment product, that is. That’s why stocks are not for everybody. After all, your risk profile has to match your investment product.
So, what risks do stocks pose?
With stocks you have no guaranteed minimum return and no right to being refunded.
A stock’s value and, hence, it’s revenue depends on the enterprise’s well-being and condition. The more successfully administered it it, the more increases its value at the stock market.
For you as a shareholder, losing your entire investment is a realistic scenario. For instance, if the venture goes bankrupt.
Stocks are extremely volatile, which means they can gain value within the blink of an eye, but they can also lose it just as fast. The frequent and fast up and down can cause emotional investment errors that might lead you to sell your shares when prices decline, because you panic.
Stocks Do Have Advantages, Though
Investing in stocks offers potentially unlimited profit opportunities. Some stocks manage to double their market value within just months.
As a shareholder you can, if the business is successful, make an additional profit from dividend payments. A dividend is an annual profit participation the company pays its shareholders.
The profit margin with stocks is higher than with many other financial products.
3 Basic Rules For Your Stock Purchase
- There is no formula for success. Stocks have a very high risk of loss. Consider investing in stocks only, if you’re fully aware of potential losses and really ready to accept them. Also, bear in mind that it can take quite some time for stock investments to draw noticeable profit.
- Another important factor you need to consider when investing in stocks is diversification: do not place your bet on one security only, but invest in stocks from various countries and branches in order to reduce your portfolio’s total risk.
- Be aware of the opposite, too, though. Do not chop you investments too much, either, i.e. beware of overdiversification. Otherwise, your banking fees and commissions might carry too much weight. Especially, if you have a limited amount of money available that you can invest.
Before investing in stocks, you definitely need a clear investment plan: set financial goals and save up enough seed money. And of course, you need to know how to manage your assets. This is all part of understanding stocks.
FinMarie is happy to support financial literacy for women and provides the competence you need to understand finances. Why don’t you book a free assessment right away and put our advisors to the test?
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