Partial ownership of a Public Listed Company
Stock investment is about buying into a fraction of the ownership of a Public Listed Company. When you decide to invest, you are offering price to somebody (i.e. sellers) to give up his/her share ownership in the Public Listed Company to you. After the seller agrees to you at your preferred purchase price, and after share ownership exchange completed, you then become a shareholder.
What happen after you become a shareholder?
As a shareholder, you are then entitled to participate in the listed company’s growth if they are profitable. When the listed company distributes Dividend, you would be entitled the fair share of your dividend.
Of course when a listed company is making loss year after year, the value of the listed company would be destroyed, and hence shareholders’ share value would fall; or even one day they may close shop and then the shares that you are holding would worth nothing.
Why invest in Stock?
There are many reasons why we choose stock as an investment asset class. Here, I only discuss about the economic reason. The main economic reason why we want to invest in listed company, because we view them as profitable. When a listed company is making profit year after year, theoretically it would be able to grow larger, or distributing dividend to shareholders year after year. If the listed company is growing, theoretically, the value of the company would also rise. For example, a burger sold today likely priced more than that of 20 years ago due to inflation. In such case, the profit made today likely to be more than that of 20 years ago. As it is able to make more profit today, hence the value of the company would worth more. This is one of the reasons why we invest in stock, i.e. to hedge against inflation with rising dividend and rising company value.
(read also 6 Benefits of investing in stock)
Why is share price rising/falling?
Share price listed on the stock exchange may fluctuate every day when the market is open, but fundamental value of the company invested may not fluctuate as much. Share price reflects the market sentiment about the company. The fluctuation can be due to many reasons, e.g. optimism or pessimism about the economy, a company’s business outlook, news, rumours etc. As far as a healthy, good business is concerned, fundamental value rarely change rapidly like the daily stock price.
Why does company go Public Listed?
There are many reasons why a company go Public Listed. Some typical reasons –
- Private business owners would like to raise capital from the public for next stage of growth. Therefore they go Public Listed.
- Venture capitalists who invested in private companies would like to list in the public as a way to exit their investment.
Who else are investing in Stock?
Institutions such as Insurance companies, Investment Companies, Asset Managers (e.g. Unit Trust), Sovereign Wealth Fund, invest in stock. They hire Investment Professionals to analyse companies, understand the industries of those companies that they invest in.
Want to learn more about investing? Like my facebook page to stay connected with smartinvesting.sg
