Abc of the stock market

The stock market is a place where sellers and buyers of shares, bonds and other financial instruments meet to transact business. The place could be a physical location like a stockbroker’s office, a trading floor at the stock exchange or even over some computer network.

The stock market is a place where sellers and buyers of shares, bonds and other financial instruments meet to transact business. The place could be a physical location like a stockbroker’s office, a trading floor at the stock exchange or even over some computer network.

The trading environment is determined by the nature of infrastructure adopted by a specific market.

In Rwanda, the market started with a dual system where buyers and sellers can meet at a stockbroker’s office while at the same time the stockbrokers meet at the open trading floor located at the Capital Market Advisory Council secretariat, on the 5th floor of Ecobank Building in downtown Kigali.

Like any other market, the stock market has its own language. More often a lot of people out there willing and able to participate in the stock market are put off by the language and terms used by the punters in the stock market. The terms are not as difficult as one may imagine. It is just a question of getting familiar with them through participating in the market.

Stockbroker

A stockbroker is an agent of investors in the stock market. They are authorized individuals who can buy or sell securities on behalf of investors. Stockbrokers are usually representatives of companies that are members of a stock exchange. They act on behalf of investors as well as on their own behalf. When acting on their own, they are referred to as dealers. They earn their income by charging a fee called a commission.

Commission

Commission is the fees charged by stockbrokers for their services. Whenever they buy for a client they charge a fee and whenever they sell for a client they charge a fee.

IPO

IPO stands for initial public offer. This is when a company sells shares to the public for the first time. IPO prices are usually fixed and offered in the primary market where investors apply for the shares directly from the company or vender but through all available intermediaries.

Shares or equities

A shares or equity is a unit of ownership in a company. A shareholder is one of the owners of the company. They enjoy all the rights including voting at the General meetings.

Bonds

A bond is a debt .When you buy a bond, you become a lender. When you buy Treasury Bonds you become a lender to the government and the government is the borrower. Equally when you buy a corporate bond you become a lender to the company. Bonds promise to pay interest or coupon at specific intervals of time during until maturity when they pay the back the original principal plus the last interest payment.

Dividend

A dividend is a distribution or payment of profits to the shareholders.

Interest

Interest is income earned on a debt. It is sometime referred to as a coupon.

Rights issue

Is an offer of new shares to existing shareholders in a company. Rights issues are usually done to increase the capital base of a company by offering the shares to the existing shareholders.

Share split

Share split is a division of shares of a company into smaller affordable prices. Companies usually prefer o have their shares well spread and when the prices rise too high in the secondary market, some companies do a share split of the par value thereby increasing the number of shares while bringing down the price of the share.

Par value

A par value of a share is the nominal registered value of the company’s capital. The par never changes unless it is slit or consolidated.

Robert Mathu is the Executive Director Capital Market Advisory Council

 

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