Understanding the stock exchange

Stock markets refers to public markets that exist for issuing, buying and selling stocks that trade on a stock exchange. / Dan Nsengiyumva.

An efficiently functioning stock market is considered critical to economic development as it gives companies the ability to quickly access capital from the public.

Stock markets, according to Wikipedia, refers to public markets that exist for issuing, buying and selling stocks that trade on a stock exchange.

 

Similarly stocks, also known as equities, represent fractional ownership in a certain company and the stock market is a place where investors can buy and sell ownership of investible assets.

 

Robert Twagira, The Head of operations at Rwanda Stock Exchange (RSE) is of the view that anyone can be an investor in the stock markets.

 

“You don’t need to officially become an ‘investor’ to invest in the stock market. For the most part, it’s open to anyone,” Twagira said.

“And after you purchase your first investment, you’ll join the ranks of investors around the world who are using the stock market to build long-term wealth.” He added.

But before you do this, Twagira pointed out that, it is important to learn what the stock market is, how it works and basic introductory investment strategies.

How investors make money.

Common terms used in this business according to Twagira include, the stock market has moved lower, or that the stock market closed up or down for the day.

Most often, he says, “It means stock market indexes have moved up or down, meaning the stocks within the index have either gained or lost value as a whole. Investors who buy and sell stocks hope to turn a profit through this movement in stock prices.”

Breaking down the process

Companies list shares of the stock on an exchange through a process called an initial public offering (IPO).

Upon listing, investors purchase those shares, which allows the company to raise money to grow its business.

At this stage, Investors can then buy and sell these stocks among themselves.

According to Twagira, the supply and demand help determine the price for each security, or the levels participants, (traders and buyers) are willing to buy or sell.

Ordinarily, buyers offer a “bid,” or the highest amount they’re willing to pay, which is usually lower than the amount sellers “ask” for in exchange.

This difference is called the bid-ask spread. For a trade to occur, a buyer needs to increase his price or a seller needs to decrease hers.

“This all may sound complicated, but computer algorithms can do most of price-setting calculations. When buying stock, you’ll see the bid, ask, and bid-ask spread on your broker’s website, but in many cases, the difference will be pennies, and won’t be of much concern for beginner and long-term investors.”

Market volatility

Like other businesses however, investing in the stock market does come with risks, but with the right investment strategies, it can be done safely with minimal risk of long-term losses.

Day trading, which requires rapidly buying and selling stocks based on price swings, is extremely risky.

Taking the coronavirus crisis as an example, the stock prices of some firms could drop significantly, while in other seasons it could be up tremendously.

According to Twagira, an investor should be ready to get it wrong at some point.

He said that it is common for someone who is actively buying and selling stocks to make a loss.

Meanwhile, Twagira also revealed that RSE didn’t encounter any losses due to the coronavirus pandemic.

“With Covid-19, we have actually seen an increase in stock markets”. He said.

As it stands, a total of ten players including those listed during the coronavirus pandemic, have so far been listed on RSE, which was established in 2009.

At the time, there was no formal exchange, rather securities were traded on what was known as the Rwanda Over-the-Counter (ROTC) – a process of trading securities for companies that are not listed on a formal exchange.

eashimwe@newtimesrwanda.com

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