Me: Do you know that AirBNB is now worth $50bn!
Friend: Whoa! That's a lie, I checked yesterday, they were only worth $35bn...
In our last post on "Business news at 9pm", we used the pizza company analogy to explain the concept of shares; how they rise and fall and how you can profit from them. We ended we how the share price of the pizza company dropped from ₦500 to ₦300 due to the discreditability of the company in making false claims.
Today, we are going to begin by explaining the short dialogue in the first paragraph, let's assume you got into an argument with a friend over the worth of the pizza company. Your friend claims that the company is currently worth ₦1,800. You on the other hand believe otherwise because the time you held their share (when it was ₦500) the worth was ₦3,000(you looked it up). How then do we know who is wrong, and how do you calculate the worth of companies using share price? Very easy. All you need to do is to multiply the price of one share by the number of shares available also know as outstanding shares.
As in the case of the pizza company, remember they have 6 shares, and the price of one share is currently worth ₦300. So the present worth of the company is 300 × 6 = ₦1,800. Therefore, the pizza company is worth ₦1,800; meaning your friend was right; this worth is also known as market capitalization. But you were not entirely wrong either. As at the time you held the share, it was ₦500, and ₦500 × 6 is ₦3000. You were also correct, however your facts were outdated. The worth of companies rise and fall every time based on the on their share prices. It's not static.
This is why you’ll hear that Jeff Bezos is the world’s richest man today and by tomorrow, it's Elon Musk and our WhatsApp copy-and-paste news correspondents will not allow us rest with the status updates. The reason for this instability is this; these men are the largest shareholders in their respective companies, and so if the stock price of Tesla does well today, Elon's worth will increase and possibly beat Jeff Bezos’ and should Amazon’s share price do well the next day, Jeff's net worth will also increase and he might displace Elon Musk from being the richest man just like it happened last week. On the other hand, should the stock price in his company fall, you can guess what would happen, right?
Now, where do all these activities; rise and fall of stock, buying and selling of shares, happen? Well, they happen on the stock exchange. A stock exchange is like a market stall where you have various items listed that you can buy and sell. In this case, the items listed are companies’ shares. Here, you can buy and sell shares and its other derivatives. There are various stock exchanges. The biggest one being the New York Stock Exchange. The total market capitalization of all the companies listed on NYSE is about $25 trillion! Yes, you read correctly, twenty five trillion dollars.
Some others include NASDAQ and London Stock Exchange. Even Nigeria has one, the Nigeria Stock Exchange (never take your money near that place, please). One thing about stock exchanges is that they aren't opened throughout the day, they have their active hours. NYSE opens by 9:00am Eastern time, and it closes by 4:00pm. Prices are recorded throughout the day, the major ones being the opening and closing price.
The opening price is the price from the first transaction of the day regarding a particular stock and the closing price is the last amount paid for a particular stock before the market closed. These prices are very important to investors to keep track of their investments. For a stock that closed higher than the price it closed with the previous day, that means it gained. For a stock that closed lower than what it closed with the previous day, it means it lost for the day. Explaining this with our pizza company, let’s say pizza closed at ₦300 yesterday, by the time the market closed today, the price was up to ₦350, that means in the course of trading today, it gain ₦50, and should the closing price be ₦295, that means it loss ₦5. These numbers are also used in calculating the percentage gain and percentage loss.
I bet you have also heard about S & P 500 or Dow Jones industrial average probably when you are watching the business news half-heartdly on CNN. And be what like what the hell does this stuff mean, Chill, these thing are just instruments used to track a group of stocks on the markets. For example, Dow Jones Industrial average is used to track the price of the 30 large companies on the NYSE and NASDAQ, while S & P 500 as the name implies is the average of the stock prices of the 500 biggest company by market capitalization on the US stock exchanges, these intrustment otherwise known as indexes by the financial gurus is used to track the overall performance of the stock market, so if you hear that S & P 500 is down by 10%, it is most likely that there was a blood bath on the stock market that day, with a lot of big name companies having their share price go down and in the case of a massive stumble, when stock prices go crashing down, it's call a bear market, and should stock prices keep rising and rising, it's call a bull market.
A lot of activities take place on the stock exchange, billions of dollars change hand every single day. It would be impossible for me to cover all of these activities, but having this foundation is enough for a start. To really get full knowledge of all these, you need experience and that’s got by trading stock yourself. I’ll write one more article in this series where I’ll take you through the processes involved in buying your first stock and why you should buy it.
Stay tuned!