- Good afternoon, Temirlan, could you tell our readers about investing in stocks?
- Good afternoon, dear readers! Before talking about investing in stocks, it is necessary to tell a little about the financial instrument itself. You know, there are many ways to attract investments and the issue of shares is one of them. A share is a security that is issued by an issuer for the purpose of raising capital. Also, the ownership of shares gives the right to participate in the management of the company, the right to receive dividends, the right to receive part of the property in case of liquidation of the company.
In accordance with the mechanism of payment of dividends and participation in the management of a joint-stock company, shares are divided into preferred and ordinary. The ownership of preferred shares does not imply the right to vote, however, the owner has the right to receive guaranteed dividends, and also in the event of liquidation of the company upon receipt of part of its property, the owners of preferred shares are in a higher priority position compared to the owners of ordinary shares. At the same time, it should be noted that before holders of preferred shares, the firm will have to pay its debts, that is, bondholders are in higher priority.
- Temirlan, you said about dividends. Could you elaborate on them in more detail, as well as tell us about the other main components of the shares.
- Dividends are a part of the company's profit, which is distributed among shareholders in proportion to their share fraction. The decision on the amount of dividend payments is made at the general meeting of shareholders. A number of companies that regularly pay and increase their dividends, as well as make payments at least once for a long time, are called dividend aristocrats.
Investments in shares imply a limitation of the shareholder's liability. The owners of the shares are not liable for the obligations assumed by the joint-stock company. That is, if an investor owns shares of a company that has accumulated debts and is now unable to pay them, then no one can demand payment of this debt from the shareholder. Therefore, the investor's losses will be limited only to the amount he spent on the purchase of shares.
The next aspect is the split and consolidation of shares. Split - is a way of dividing one share into several shares to increase the liquidity of securities for retail investors: after such splitting, the initial share with a market price, for example, of 100,000 tenge, will cost 10 times cheaper. This will allow some investors to buy shares that were previously too expensive for them, and other market participants, on the contrary, to sell part of the package, but keep the position in the portfolio. It should be clarified that the total nominal value of all shares of the company does not change under such a procedure, as does the share of ownership of the company in the accounts of each owner. Consolidation of shares is the reverse procedure of the split. As a rule, this is necessary if the exchange has a requirement for the minimum value of the paper admitted to trading. If the value of the company's securities is less, then the issuer is either forced to resort to the services of market makers and increase the value, or can simply consolidate the shares (instead of 100 shares worth $ 1, each owner will receive 1 share, but worth $ 100).
- And if an investor decides to sell shares, then he loses the opportunity to receive dividends?
- Yes, the investor will stop receiving dividends after the sale of shares, but by selling, he can receive the capital gain income from the increase in share price.
- Are losses possible in such cases?
- Yes, if the share price decreased after the acquisition. It is necessary to be clearly aware that stocks are more profitable, but also may bear more risks and be more volatile asset relative to bonds. At the same time, shares are also classified according to the degree of risk and, accordingly, potential profitability.
- Temirlan, what trends can be observed on the stock markets at the moment?
- Unprecedented quantitative easing in a number of countries, carried out in order to stimulate the economy after the pandemic, led to an increase in global inflation. In addition to this, the disruption of global supply chains in 2020-2021, as well as the realisation of geopolitical risks in February last year, were also factors of increased inflationary pressure. The growth and acceleration of inflation forced the world's central banks to move to monetary policy tightening in 2022.
So, for example, the US Federal Reserve raised the rate in 2022 by 4.25 percentage points from 0-0.25% to 4.25-4.5%. In the context of tightening monetary policy, stocks are usually under pressure, which is observed today. Thus, the S&P 500 index by the end of 2022 decreased by 19.4%, NASDAQ – by 33.1%, STOXX Europe 600 – by 12.9%, Shanghai composite index – by 15.1%, NIKKEI – by 9.4%.
Besides, the tightening of the monetary policy is expressed in quantitative tightening, in which the central bank reduces the balance sheet or sells existing securities. For example, the FED reduced its balance sheet by $414 billion in 2022. Despite the fact that the plan announced at $525.5 billion was not fully implemented, quantitative tightening put pressure on the stock market.
- Temirlan, what else would you advise an investor to pay attention to today when making decisions about investing in stocks?
- Fundamental analysis is a way of estimating the value of financial instruments based on their basic characteristics, taking into account a wide range of factors. Its purpose is to determine the value of securities that can be "cheap" or "expensive" by fundamental factors. The study of financial statements of companies and the comparison of multipliers of the company is called relative value, and the free cash flow method is another method, which presumes discounting of cash flows in order to derive company value.
Technical analysis is an effort to determine the direction of movement of an asset based on statistical patterns of price movement. It is useful when an investor is determined with the entry point to a position, however, when making an investment decision, a fundamental analysis should also be carried out.
The correct definition of goals and investment horizon for yourself will help to form a strategy. It is also worth paying attention to the study of the company's development plans and its management.
- Temirlan, thank you for such an interesting and detailed interview. We hope that this information will be useful to our readers. We wish you success in your business!
- Thank you, have a nice day!