Stock exchange lingo in layman’s terms: Part 1

The share price, the JSE, the Nasdaq, percentage points, dividends, and, and, and. What does it all mean? How does it affect me? This is how some react when they read or hear business news as their eyes glaze over all those numbers. But over time you hear some words and phrases again and again. In this series, we will be looking at the stock exchange and some of its common jargon and what it means in simple English.

What is a stock or a share?

A stock or a share in a company is the same thing, but in South Africa we use the word share more often.

When you buy a share in a company, you are buying a piece of the ownership of a company, becoming a part-owner. Most of the time you are buying that share from someone who wants to sell their share of a company. One exception would be if it is the first day that a company is becoming a publicly-listed company on the Johannesburg Stock Exchange (JSE), the New York Stock Exchange, the Nasdaq or one of the many stock exchanges around the world.

Owning shares often means you get to vote on its leadership, the direction the company takes and how it is run. The more shares you have, the greater say you have in a company. This is in your interest because you want the company you buy into to excel. If the company continues to grow and its share price rises, you can sell your shares later at a profit.

Another way you can profit from a growing company is if it decides to give you and other shareholders a part of its earnings. This is called dividends. The more shares you have in a company, the more dividends you will earn.

Before computers and the internet digitised the world’s financial markets, you owned physical pieces of papers called stock certificates to show that you owned shares. Luckily you don’t have to phone companies anymore to request replacements if you lose a stock certificate.

What affects the share price?

The market determines the share price, but many factors affect the market and therefore the share price. Here are some of the most common of many factors that could lead to fluctuations:

• Supply and demand: If the share price of a company is R10 today and 100 people want to buy it, but only one shareholder is willing to sell their shares for R10, the price of a share will rise, because the share is in demand. The opposite holds true, if there are more sellers than buyers, the share price will probably drop;

• News events: Part of the share price is not only what it is valued today, but also its long term value. You are not going to buy a share today if you expect its value to drop in the future, because you want to make a profit. Therefore, news around a company can affect its value, because shareholders and investors are looking at what is happening at the company to determine whether to buy into it or not. If a company is buying a new company to become bigger, that will likely be regarded as good news and increase the share price, because it shows the company has excelled, has money to spend and will probably keep growing. If a company announces retrenchments, it probably means the company is struggling and its share price will drop;

• The local and global economy: Sometimes the fate of a company and its performance is out of its hands. The Covid-19 pandemic is a good example. Before the pandemic, certain companies might have invested money for what is projected to happen in the next five to 10 years, but the current pandemic has come along and wiped it away. Airlines are one example. Since the pandemic, global travel has been severely curtailed as many countries implemented lockdown measures and even closed their borders. This meant flights had to be cancelled and planes grounded, cutting off a major source of income to airlines; and

• Government policies and elections: The market and investors are closely monitoring the government, its policies and its possible future leaders to predict what might happen next, because governments might not have full control of economic growth, but it can help to create jobs, encourage investment and offer money to prop up local businesses and the local economy.

What is a stock market or stock exchange?

A stock exchange and a stock market are the same things, but in South Africa we use the term stock exchange. This is where investors can buy and sell shares, much like a marketplace.

The Johannesburg Stock Exchange (JSE) is one of many stock exchanges around the world and one of the largest ones in Africa. The largest stock exchange in the world is the New York Stock Exchange. Every stock exchange has its own criteria if a company wants to be listed there and some specialise in certain fields. For example, the Nasdaq in New York is where most newer and often technology companies such as Apple, Microsoft, Amazon and Alphabet (the parent company of Google) are listed.

The JSE has a physical trading floor where investors can be in the same room together. However, it has not been necessary to trade shares in person for years thanks to computers and the internet.