Stock Exchange for Beginners
Stock Exchange for Beginners
QSE knowledge centre enables enthusiastic and intelligent investors to fully comprehend the investment opportunities offered in the market, by providing them with the required knowledge and information on securities market essentials, types of listed securities, how to trade them knowledgeably on the stock exchange, types of investment returns such as dividends and capital gains and, last but certainly not least, how to effectively mitigate your risk to the least possible levels.
Content
What is a Share (Stock)?
A Share (Stock) is a unit of ownership in a company. Hence, if you own a share in a company, you own a portion of this company and you become a “shareholder”. The shareholder in a company is eligible to share the company’s success i.e. profits and dividends. But on the other hand, is also exposed to the company’s failures i.e. losses and bankruptcy.
Example
If a company’s share-capital is formed of 10,000 shares (stocks) and you own 100 shares, this means you own 1% stake in this company.
If the company announces QAR 100,000 as net profits, you are eligible to a part of this profits equals to QAR 1,000 (1% of the net profits).
If the company decided in its annual general assembly meeting (AGM) to distribute 50% of the profits as cash dividends, you will receive QAR 500 in your bank account.
Also, your shares give you the right to attend the AGM and vote on the company’s decisions.
Shares have two important values to understand; nominal value (par value) and market value. Nominal value (par value) is the value of the share when it was initially issued upon the incorporation of the company. It is also known as the value at which shares are usually offered during initial public offerings (IPOs) of newly established companies. While market value is the share price in the market which is determined based on the forces of supply and demand.
What is the difference between Primary Market and Secondary Market?
| Primary Market | Secondary Market (Stock Exchange) |
|---|---|
| Shares are initially offered to investors in the primary markets in which companies go public. | After shares are initially offered in the primary markets, they are usually listed on secondary markets. |
| Shares are sold directly from the issuing company to investors in a process called initial public offering (IPO). | Shares are traded (bought and sold) amongst investors in the stock exchange. |
| Shares are issued and sold to investors in the primary market in nominal (par) value. | Shares are traded between investors in the secondary market in market value (share price). |
| Nominal (par) value of listed companies is fixed at QAR 1. | Market value (share price) of listed companies is changeable according to supply and demand factors. |
What is a Stock Exchange?
A stock exchange is the place or the platform where investors gather to buy and sell financial securities such as shares of public shareholding companies, ETFs units and bonds. In Qatar we have only one stock exchange; Qatar Stock Exchange (QSE).
Invest Knowledgeably and Trade with Confidence
Investment is a key to wealth creation and sustainability, reaching your financial goals and to secure your future. Investments in financial instruments particularly in QSE’s listed companies can offer you a rewarding opportunity to achieve your financial goals. QSE also provides investors with the ability (ease) to buy and/or sell shares on a timely basis, unlike other types of assets such as real estate, time-deposits ... etc. in which the investor may need some time to liquidate. Stock exchanges, in general, provide investors with a variety of investment vehicles. QSE for example offers a diversified market of listed companies distributed over many sectors representing the Qatari economy, the one with the highest GDP per capita in the world, and one of the fastest growing economies globally.
How are shares prices determined in the stock exchange?
Shares prices are determined freely on stock exchanges based on supply and demand. The higher the demand on a share the higher its price and vice versa. Basically, supply and demand is formed according to some factors affecting decisions taken by investors such as fast growth of a company, net profits or losses, corporate actions (cash and/or stock dividends), general economy conditions e.g. oil prices, GDP growth rate, inflation rate, interest rates … etc.
Main Types of Securities
Shares
They are ownership units issued by the company with equal value (nominal value) and are tradable in the stock exchange. Shares represent the capital of the company and are called equity financial instruments. Therefore, if you own shares in a specific company, you own a part of this company and become a "shareholder" in it. For more information on QSE listed shares, please click on the link below:
https://www.qe.com.qa/listed-companies
Bonds
A bond is a debt security which represents a loan to a borrower (also known as the issuer) by a lender (the investor). The issuer promises to pay the investor a specified rate of interest (the coupon rate) on the amount it has borrowed. This interest, the coupon payment, is paid on a regular basis until the Bond’s maturity date, and then the issuer repays the borrowed amount (the principal) to the investor. Bonds are also referred to as fixed-income securities because the income that an investor receives from the bond investment is usually fixed and paid on a regular and predictable basis. For more information on bonds and treasury bills, please click on the link below:
https://www.qe.com.qa/debt-securities
Exchange Traded Funds (ETFs)
An ETF is defined as an open-ended fund designed to passively track the performance of a benchmark index so that the fund's components mimic the components of that index. The index may consist of stocks, bonds or commodities. ETF units have a number of advantages, i.e. liquid, tradable in the stock market, transparent and provides investor with diversification. For more information about ETFs, please click on the link below:
https://www.qe.com.qa/etf-product
Real Estate Investment Funds (REITs)
REITs are investment units in real estate portfolios of a commercial nature, which own real estate investment funds and manage income-generating real estate properties and pass most of their earnings and capital gains onto the shareholders in those real estate portfolios. REITs are closed funds unlike ETFs and are listed and traded usually on stock exchanges. For more information about real estate investment funds, please click on the link below:
https://www.qe.com.qa/reits
Comparison between Shares and Corporate Bonds
| Shares | Corporate Bonds |
|---|---|
| They are ownership units issued by the company with equal value (nominal value) and are tradable in the stock exchange. Shares represent the equity capital of the company. Therefore, if you own shares in a specific company, you own a part of this company and become a "shareholder" in it. Shares are also referred to as equity securities. | A bond is a debt security which represents a loan to the company (also known as the issuer) by a lender (bondholder). The company promises to pay the bondholder a specified rate of interest (the coupon rate) on the amount it has borrowed. This interest, the coupon payment, is paid on a regular basis until the Bond’s maturity date, and then the company repays the borrowed amount (the principal) to the bondholder. |
| The shareholder is an owner of a part of the company. | The bondholder is a creditor to the company. |
| Shareholders are eligible to a portion of the company’s profits (dividends) as well as having a right on its assets equivalent to their ownership percentage. | Bonds are also referred to as fixed-income securities because the income that a bondholder receives from the bond investment is usually fixed and paid on a regular and predictable basis. |
| As a shareholder, you have the right to attend shareholders’ assembly meetings and the right to vote on the company’s decisions. | As a bondholder, you don’t have the right to attend shareholders assembly meetings or vote on the company’s decisions, unless you are a shareholder in the company. |
| The shareholder’s entitlement to the company’s assets can only be exercised if the company goes bankrupt and liquidated. In case of bankruptcy, the shareholder receives what’s left after all creditors have been paid. | The bondholders are entitled to repayment of the bonds face value (the principal) on maturity date. |
ETFs compared with Mutual Funds and Shares
| Features | ETFs | Mutual Funds | Shares |
|---|---|---|---|
| Diversification | 0 Yes | 0 Yes | 0 No |
| Liquidity | 0 Yes | 0 No | 0 Yes |
| Transparency | 0 Yes | 0 No | 0 Yes |
| Flexibility | 0 Yes | 0 No | 0 Yes |
| Low Cost | 0 Yes | 0 No | 0 Yes |
| Ability to track index | 0 Yes | 0 Yes | 0 No |
Common Investment Guidelines and How to Mitigate Risk
- Know your Investment Goals and Strategy: long term capital gain, regular dividends or both…etc.
- Learn about the market and listed securities: financial statements, price-sensitive information, historical prices, resistance and support, financial and technical analysis…etc. so that you can take informed investment decisions.
- In stock market, use the part of the funds that you don’t expect to need in the short-term.
- Define your stop loss point when buying a stock.
- Keep part of the funds available for investment in the form of cash and do not use all of them in purchasing securities, as this helps to achieve appropriate price averages if stocks prices drop.
- Diversification is a key to mitigate risk, hence, form a diversified portfolio of securities, as a decline in the share price of a particular company can be compensated by the increase in the price/s of the remaining securities in the portfolio (don’t put all the eggs in one basket).
- It is preferable for the investor to focus on long-term investment, as high frequency trading is not recommended if the investor does not have sufficient experience and time to follow the market in real time.
- From time to time, study and review your portfolio: What is suitable for your investment today, may not be the best for it in the future, it may be necessary to get rid of poorly performing securities that reduce the overall profitability of the portfolio. When the economic situation changes, be ready to make portfolio changes as well.
- Start investing as early as you can, even in small amounts.
- Don’t go with the herd: (get cautious when people are greedy) – (get hopeful when people are fearful) and this will enable you to apply the most important advice in stock markets i.e. “Buy low – Sell high”.
