The Stock Market and Concepts of Trading

3/24/2021 The Stock Market and Concepts of Trading
The Stock Market and Concepts of Trading
Site: Stock Market College Printed by: Letladi Paul Lamola

Course: Financial Markets Education Date: Wednesday, 24 March 2021, 8:40 AM
Book: The Stock Market and Concepts of Trading
https://learn.stockmarketcollege.com/mod/book/tool/print/index.php?id=215 1/59
Description
Table of contents
Important note
History of the Stock Market
What is the Stock Market?
What is a Stock Exchange?

Advantages and Disadvantages of an Exchange
Session Times
Supply and Demand
Stockbroker vs Online Trader

Stockbroker
Online Trader
Types of Traders
Why trade the stock market – investing vs trading
Volatility
Volume
Liquidity
Leverage
Bull & Bear market
What is a share?
The Share Price
Type of shares
Dividends
4 Stages of a share price
Trading Account Margin
Trading Fees
Technical Analysis
Fundamental Analysis
Quantity, Risk and Reward
Time Frames
Long and Short Trades
Call and Put Options
Bid and Ask
Stock Market Sectors

Basic Materials
Consumer Goods
Financial Sector
Health Care
Industrial Goods
Consumer Services
Technology Sector
Construction Sector
Financial Services Sector
Travel and Leisure Sector
Energy Sector
Pharmaceutical and Biotechnology Sector
Telecommunications Sector
Real Estate Sector
Tobacco Sector
Media Sector
Forestry and Paper Sector
What Instruments are traded in the nancial markets?
Stash
Important note
History of the Stock Market
In 1602 the Dutch East India Co was formed and was the rst joint-stock company having issued the rst paper shares, making an
exchangeable medium, allowing shareholders and investors to buy and sell shares to other shareholders and investors. Depending on
how many shares a shareholder owns, the shareholder may own a portion of the company. A share certi cate (certi cate of ownership)
is issued to the shareholder documenting the number of shares purchased.
The rst company to have xed capital stock was the Dutch East India Company and its company stock was continuously traded on the
Amsterdam Stock Exchange. Trading in di erent derivatives followed shortly after this initial trading.
The Dutch East India Company was involved in the importing of goods from India and sold shares to investors wishing to invest in
shipping trade ventures. Investors who purchased shares in the voyage pro ted with dividends being paid to investors on sales of
goods once the ship returned from its voyage.
Today the stock market is worldwide allowing traders to trade all markets regardless of their location.
What is the Stock Market?
The stock market is the accumulation of all stock exchanges worldwide where various instruments are traded.
Initially shares in companies are listed for trading in the primary market. This is where the initial o ering of company shares takes place
and is traded. It is called the Initial Public O ering (IPO). This is where a company goes public to raise capital.
Shares are then traded on what is known as the secondary market. This is where shares of public listed companies are traded by
individual traders who buy and sell shares amongst themselves at market or agreed prices. Such trades take place through regulated
authorities or stock brokerage houses.
What is a Stock Exchange?
A stock exchange is an exchange where companies list in order to go public and o er shares for trading. There are many stock
exchanges in the world which together form the overall stock market. Each country will have its own stock exchange and can have more
than one.
The stock exchange facilitates stock brokers to trade company shares and other securities. In order for any stock/share to be traded, the
company has to be listed on a stock exchange.
There are rules and regulations governing these stock exchanges that determine whether a company may list and stay listed for trading.
Advantages and Disadvantages of an Exchange
Advantages of Trading on a Stock Exchange:
The cost of trading compared to other investment vehicles is relatively low.

The value of a stock/share can be known at any time by accessing the share price through a stock broker or trading
platform.
With the use of online trading platforms, trading on a stock exchange is simple and easily accessible.
Due to high volumes of traders, one has a greater opportunity to sell shares to waiting buyers.
With knowledge on trading, trading can o er a higher return of investment than any other type of investment.
Pro table companies pay regular dividends to shareholders.
Stock Exchanges maintain strict rules and regulations, reducing risk of fraud.
Trading requires a smaller capital outlay than an investment like property, making it more accessible to all.
A shareholder owns shares in the traded company, with certain rights, but is not held liable or accountable for any losses
incurred by the company.
Risk can be minimised with trading discipline and a trading strategy.
Access to trading funds is a simple process with little delay.
Disadvantages of Trading on a Stock Exchange:
While it is always possible to sell a share, you are not guaranteed of the share trading at the price you want to sell it at, as
share prices rise and fall.
Trading successfully requires knowledge and dedication.
Share prices uctuate and may result in a pro t or loss for the trader.
Session Times
Session Times for trading Shares/Derivatives and Forex
SHARES
Shares are traded on the individual stock exchange on which they are listed and therefore can only be traded during the individual stock
exchanges' market (open-close) local times. This will vary from country to country. The market will normally open at 08h50 local time
when institutional traders will make bids for stock at reduced prices and continue to 09h00. This period wherein institutional traders
operate is called the Auction Market. Institutional traders are not able to negotiate with buyers and sellers and settle for the seller's price
during Auction. An end of day auction also takes place between 16:50 and 17:00 for institutional traders.
From 09h00, over the counter (OTC) or retail traders will enter the market and start the negotiation process between buyers and sellers.
The market for the OTC trader closes at 16:50. It is recommended that retail traders not enter the auction to trade as there are no
guarantees that their match of price and quantity will be executed.
A de nition of an Auction Market: a time where buyers and sellers enter competitive bids simultaneously. An Auction market does not
involve direct negotiations between individual buyers and sellers, while buy and sell negotiations take place with over the counter (OTC)
trades.
THE FOREX MARKET
Taking the above into account, trading Forex is the exception to the rule as the forex market is traded globally and due to the various
international session times, forex can be traded 24 hours a day, Monday to Friday (24/5).
Major Forex Session Times:
Supply and Demand
Why do Stocks or Currency Prices Fluctuate?
The stock market is in its essence, a giant auction. The price of a stock/currency is determined by supply and demand.
If there is a demand for the share/currency the price will rise as traders are willing to pay more for the share/currency.
A lack of demand for a share/currency will result in the price falling as traders are not willing to pay the current price of the
share/currency and in order to sell, traders will have to o er the share/currency at a lower value.
GREAT DEMAND = PRICES RISE
LOW DEMAND = PRICES FALL
For example, if there are more people wanting to buy a stock than to sell it, the price will be driven up because those shares are scarce
and people will pay a higher price for them. Why do Stocks or Currency Prices Fluctuate?
Conversely, if there are a number of shares for sale, but a lack of interest in the market place, prices will decrease.
Other factors that a ect supply and demand and in the end an increase or decrease in price:
Company news: whether the release of information about a particular company is positive or negative or unexpected, the trader may
either react negatively or positively. The more buyers one has for the company's shares, the higher the price. If there is little demand
for the shares, the price will be lower.
Industry trends: If there is a change in trend for a speci c item, the share price may either increase or decrease due to the demand being
greater, the supply reduced and the price increased. Competition between companies in a certain sector also either drives the share
price up or down.
Economic factors: an increase in interest rates and in ation often results in a decrease in demand due to a negative outlook, resulting in
a lower demand and therefore reduced prices.
Stockbroker vs Online Trader
Trading the stock market requires a trader to place trades on the stock market through an exchange. This requires working through a
stockbroker.
There are two ways to place trades, either by using a stockbroker to place trades on your behalf or by placing trades using an online
trading platform.
When deciding on which stock brokerage to work through, make sure the stock brokerage rm is licensed with a regulatory board and has
an FSP (Financial Services Provider) Number indicating they are licensed and an Authorised Financial Services Provider. Check that they
have a good track record and ensure that they are able to assist with trading either for you, or give advice or trade for you. Are their
brokerage fees competitive? A brokerage fee is the fee you will be charged each time you enter or exit a trade. Di erent brokerages
charge di erent brokerage fees.
Stockbroker
A stock broker is a quali ed trader working for a brokerage rm that is licensed to give investment advice and trade on behalf of the
man in the street (unlicensed trader).
Working through a stockbroker allows you to transact in three di erent ways:
Execution-only (limited discretionary mandate), which means that the broker will only carry out the trader's instructions to buy or sell.
This means YOU, the trader makes all the trading decisions on when to buy and when to sell.
Advisory dealing (limited discretionary mandate), where the broker may only advise the trader on which shares to buy and sell. The
nal decision is that of the trader.
Discretionary dealing (full discretionary mandate), is where the stockbroker determines the trader's investment objective and makes
all the trading decisions on behalf of the trader. The trader gives the stockbroker full and complete control over all dealings and
cannot hold the stockbroker liable for any losses he incurs. In order for the stockbroker to assist the trader to achieve his nancial
goals, he needs to be very clear as to what they are. Communication is key to a successful relationship.
If you decide to trade through a stockbroker, allowing the broker to trade on your behalf, you should expect your stockbroker to perform
the following:
A stockbroker is expected to:
Research the nancial markets before making a trade decision

Consult investment analysts when applicable
Provide a report with all trading activity
Monitor your trades and guide you
Trade on your behalf either aggressively, moderately or conservatively as predetermined by you and the license category of the
brokerage.
Online Trader
Online trading is trading through a stock brokerage rm making use of their online trading platform. The trading platform lists all
shares/currency pairs o ered by the brokerage which you can trade and lists the live prices. Using the online trading platform allows
the trader to make his own trading decisions and place and monitor his trades himself. This is done at the click of a button eliminating
the need to contact your broker to place trades for you. Online trading places trading in your hands giving you full control over your
trading.
When using an online trading platform, all records of your trading transactions are recorded and readily available for your viewing. You
are able to view the current pro t/loss you have made in your open trades in live time as well as access past trades, details of entry/exit
levels and pro ts/losses. Keeping record of your trading history enables the trader to learn from his past trades showing the pro ts and
losses made.
It is important to remember all trading can only take place during market session times ie when the market is open for trading.
However, in order to trade online you require:
a reliable internet connection

a trading platform
knowledge on the use of the platform
keeping your trading account secure
knowledge about nancial markets behaviour
As you are able to access your trading platform either through an online web terminal or via a download to a preferred device, you need
to ensure you keep your trading account secure. Never give your trading account passwords to anyone else as this would allow them to
access and trade on your account. It is recommended for you to not allow your computer to save your password as this would put you at
risk should someone gain access to your device.
Online trading makes trading the stock market a possibility for anyone.
Types of Traders
A trader is named by his appetite for risk.
Below we refer speci cally to the Retail Trader who trades for his own personal account and not to an institutional trader who buys and
sells securities for accounts managed for a group or institution.
Largely, the retail trader is in need of leverage in order to participate in the market as he may not have the capital to do so. All
derivatives like CFD’s, SSF’s, Forex, Indices etc are leveraged instruments. The trader may “borrow” money to increase his exposure on
the market. It is important to remember that this leverage di ers from instrument to instrument and broker to broker. For example,
some brokers would o er a 1:100 exposure (for every USD1, you will be able to trade for USD200) for a certain instrument while another
would o er 1:200 on the same instrument.
Risk management is key when trading a leveraged instrument.
Types of Traders
Traders are often labelled according to the risk they take over a short-, medium- or long-term period and whether they are wanting
capital or income growth.
Should a trader want capital growth rather than income growth, he would expect a return on his money over a longer period of time.
Let’s have a look at:
types of trader on the market,

the term,
risk involved and
types of instruments traded to obtain the required result.
A Scalper – The aggressive, high risk trader. This trader risks high losses and will trade in riskier conditions. He may not always wait for
con rmations on buy/sell signals but will take the risk to enter trades as soon as a signal shows. His indicators will be set using fast
moving averages which signal more opportunities to buy/sell knowing that the faster the moving average the more false signals
generated. He is willing to risk a false signal. He closes any amount of pro t no matter how small it is. He trades for income growth. He
spends a large amount of time in the day monitoring market performance and positions. He opens and closes positions regularly, holding
positions from seconds to minutes. As an intra-day trader with an appetite for risk, his preferred instrument is a derivative. (CFD’s, Forex,
Indices etc).
A Day Trader – Even though he operates in a risky environment, like the Scalper, he does his analysis, waits for con rmations and takes
his time before placing positions. He only takes pro ts towards the end of the day. He is a short-term trader and has an appetite for risk
but is a day trader, not an intra-day trader like the scalper. He trades for income and his preferred instrument is also the derivative
(CFD’s, Forex, Indices etc).
A Swing Trader – A Swing trader is not as aggressive. He will leave trades running for days and is not worried about paying swaps
(interest) should he need to do so. Even though he trades for income, his risk is lower than a Scalper or Day Trader and trades over a
medium-term period as he hold positions from a few days to two or three weeks, intra-week or intra-month. He takes care with placing
his trades, waits for con rmations on buy/sell signals and will enter trades only once the market conditions move in his favour. He will
exit a trade before a change in trend direction. His preferred instrument is a derivative (CFD’s, Forex, Indices etc).
A Long-Term Trader – He is a conservative trader. The idea behind this approach is that the trader executes fewer trades, but that
produce larger individual gains. He will not enter a trade until he has de nite con rmation of the market conditions moving in his
predicted direction and will exit at the rst sign of change in trend. He will trade strong trends only and will use indicators with longer
parameters to reduce false signals. He trades for capital growth and is not swayed by movements in the market. He trades to bene t
from dividend payouts. Traders using this approach are well prepared and have the relevant knowledge to trade long-term. Positions will
be held for a period of 6 months to a year and longer. His preferred instrument is an equity.
Why trade the stock market – investing vs trading
Individuals trade or invest on the stock market for one purpose: to pro t nancially.
Investing on the stock market is where traders enter long term trades, with the expectation of the share price rising steadily in the future
over a long period. Investors can buy shares and keep them in their portfolio for years at a time, patiently waiting for the bene t of the
share price rising signi cantly. Investors also take dividend payments into account, earning passive income from their investment.
Trading on the stock market generally refers to the more active trader who is looking to make smaller pro ts more frequently through
entering and exiting multiple trades. While they also bene t from dividend payouts should they be in the trade at the time of dividends
being paid, dividends are not necessarily a reason for them to remain in their trade.
Volatility
Volatility is the extent and range of change in price that a share/currency experiences in a given period of time.
If the price stays relatively stable, the share/currency has low volatility.
A highly volatile share/currency is when the share/currency reaches new highs and lows, moving erratically, and experiencing rapid
increases and dramatic falls.
Volatile markets carry greater risk as prices can decrease or rise in a very short period of time with quick changing trends. However, in
volatile markets the price is likely to move a lot faster than in markets of little volatility which means there is the opportunity to make
quick pro ts.
Volume
Volume is considered the heart of the stock market, as it is an indication of how much support from traders there is behind a price
movement.
It’s important that you know what volume is because it either supports or denies the legitimacy of price action. Volume can often make
or break your trade. Volume is a measure of the number of shares that have been exchanged or traded within a speci c period of time.
It is essentially how much buying and selling was going on within that period of time.
Liquidity
Liquidity is the measure of how easily an asset can be turned into cash.
Liquidity in trading is the ease with which buyers and sellers can either buy or sell their share/currency. It is based on supply and
demand. Shares/Currencies that have lower liquidity tend to have a wider spread (cost). Liquidity can be de ned as the existing
demand for a product or service. In the nancial markets, when we refer to liquidity, we mean how easily or fast a speci c currency
pair/share can be traded.
In other words, liquidity refers to the level of market interest – the level of buying and selling volume. The higher the volatility, the
faster and easier it is to buy or sell a share/currency. From a trading perspective, liquidity is a critical consideration because it
determines how quickly prices move between trades and over time. A highly liquid market like forex can see large trading volumes
transacted with relatively minor price changes.
In the forex market for example, some currencies are more liquid than others, like the US Dollar, Euro etc. While small or unstable
currencies are less liquid because you cannot use them anywhere apart from the issuing country and, therefore, cannot sell or
exchange them for another instrument.
When entering a trade, liquidity is an important factor to consider as you want to be able to close your trade easily with many
buyers/sellers being in the market.
Volume is a good indication of liquidity. The higher the daily volume for a share/currency is, the higher the liquidity.
High liquidity ensures that at the moment when we want to buy or sell shares, there will be enough sellers or buyers on the other side of
the fence.
Well done! Knowledge stash increased!
[stashdrop secret="aV64ww" text="Pick up!" image]
Leverage
Leverage or gearing simply means to trade with “borrowed” funds – the value of currency transactions engaged in is higher than the
amount a participant has on margin.
Leverage is a double-edged sword: highly leveraged positions can lead to large gains if the exchange rate between two currencies moves
as anticipated, but will cause large losses if the exchange rate moves in the opposite direction. The concept of being “wiped out” is not
just a theoretical possibility, but a real one. There is a real danger that a participant will overplay his hand with leverage. It is also essential
that leverage should be understood correctly as misconceptions about actual leverage employed may be disastrous. Leverage must not
be seen as a “magic wand” used by participants to replace inabilities to trade properly. Too high leverage skews short-term trading results
– both pro ts and losses.
For example, to control a usd10 000 position, you will set aside usd100 from your account. Your leverage, which is expressed in ratios, is
now 100:1.
You’re now controlling usd10 000 with usd100.
Let’s say the usd10 000 investment rises in value to usd10 100 or usd100.
If you had to come up with the entire $10 000 capital yourself, your return would be a little 1% (usd100 gain / usd10 000 initial
investment).
One should distinguish between two types of leverage, minimum and maximum leverage.
Bull & Bear market
When hearing others speak of a bull or bear market, few know the di erence and what constitutes each market.
The use of 'bull' and 'bear' to describe markets comes from the way the animals attack their opponents. A bull thrusts its horns up into
the air, while a bear swipes its paws downward. These actions are metaphors for the movement of a market. If the trend is up, it’s a bull
market. If the trend is down, it’s a bear market.
Bull Market = Upward trending market (Prices rising)
Bear Market = Downward trending market (Prices falling)
Bull markets are characterised by optimism, with traders con dent and expectant that strong results should continue. It is di cult to
predict consistently when the trends in the market might change. Part of the di culty is that psychological e ects and speculation may
sometimes play a large role in the markets.
Bull markets and bear markets often coincide with the economic cycle, which consists of four phases: expansion, peak, contraction and
trough. The onset of a bull market is often a leading indicator of economic expansion. Because public sentiment about future economic
conditions drives stock prices, the market frequently rises even before broader economic measures, such as gross domestic product
(GDP) growth, begin to tick up. Likewise, bear markets usually set in before economic contraction takes hold. A look back at a typical U.S.
recession reveals a falling stock market several months ahead of GDP decline.
Bullish traders are those focused on identifying prices that are likely to increase in value. A bull invests when he believes the price of the
share or underlying asset are set to rise.
A Bear market is the opposite of a bull market. It is a condition in which prices fall and widespread pessimism causes the market’s
downward spiral and selling increases.
What is a share?
A share is a single unit of ownership in a corporation, mutual fund, or other organisation. A joint stock company divides its capital into
shares, which are o ered for sale to raise capital, termed as issuing shares. A share is therefore an indivisible unit of capital, expressing
the proprietary relationship between the company and the shareholder. The denominated value of a share is its face value: the total
capital of a company is divided into number of shares.
Someone who owns one or more shares is called a shareholder.
Shareholders may receive cash ows (dividends) if a company’s board of directors declares that the company has performed well and
has enough pro t to distribute to its shareholders.
You can also call a share, ‘equity’ or ‘stock’.
The Share Price
As the share is simply a divided-up unit of the value of a company, if a company is worth USD100million, and there are 50 million shares
in issue, then each share is worth USD2 (usually listed as 200cents.) As the overall value of the company uctuates so does the share
price. Shares can, and do go up and down in value for various reasons. However, such movements are not usually for the most obvious
of reasons.
The total value minus company borrowings would be divided by the number of shares in issue and this then would be the value of each
individual share.
Type of shares
There are four main categories of shares that exist for investors to invest in. Companies create these categories to provide for the
di erent demand or result objectives that investors have.
These categories are usually determined by:
the amount of risk the investor is prepared to take,

the extent of the investor’s ability to be involved in the management of his portfolio.
1. Ordinary Shares
Newcomers to investing usually tend to trade mainly in ordinary shares due to the fact that most beginners, and especially the more
aggressive but less experienced beginners, seem to have the same objectives – to realize good returns over the short term, to be
involved in the action whilst gaining as much experience in as quick a time as possible and of course, to have some fun and excitement.
Standard shares with no special rights or restrictions. They have the potential to give the highest nancial gains, but also have the
highest risk. Ordinary shareholders are the last to be paid if the company is wound up. Shareholders who own ordinary shares are
entitled to:
attend and vote at general meetings of the company they hold shares in.
receive annual reports.
share in the pro ts of the company through dividends, should the directors decide to distribute some of the pro ts to the
shareholders.
a return on his share of the underlying assets if a company should cease to exist; however, holders of ordinary shares have only a
residual claim against the assets of the company after the settlement of all prior claims. Even their claim against earnings is residual in
the sense that all prior charges such as interest, debenture payments, and arrear dividends on preference shares must be settled rst.
These shares are typically divided into a further subset of CAPS (capitalisation), which is a classi cation of the size of a stock. It is
represented by the share price multiplied by the number of shares owned by investors.
For example, if a company was trading at R10 a share and had sold 1 billion shares of stock, the market cap would be 10 billion.
There are three major classi cations of caps – large cap, mid cap, and small cap:
Large Caps have a market cap of 10M or higher.

Medium Caps have a market cap of 2-10M.
Small Caps have a market cap of less than 2M.
The advantages of investing in di erent caps are pretty simple: the largest cap stocks tend to increase in price slowly, but are so big
they rarely take drastic dives in price. Smaller cap stocks on the other hand have much more potential for growth but also have a much
larger potential to go bankrupt. Small cap stocks o er more potential reward but also more risk.
2. Redeemable Shares
Redeemable shares come with an agreement that the company can buy them back at a future date – this can be at a xed date or at the
choice of the business. A company cannot issue only redeemable shares.
As a precaution, beginners usually start with fewer funds in order to achieve their objectives whilst limiting risk. These investors will
select the cheaper shares in this category and participate actively with regular trades, concentrating on identifying shares with value
and growth potential and determining the critical turning points.
Novice investors usually don’t concern themselves with dividends but usually concentrate on the share price volatility brought on by
dividend forecasts.
3. Preference Shares
Preference shares typically carry a right that gives the holder preferential treatment when annual dividends are distributed to
shareholders. Shares in this category receive a xed dividend, which means that a shareholder would not bene t from an increase in the
business’ pro ts. However, usually they have rights to their dividend ahead of ordinary shareholders if the business is in trouble. Also,
where a business is wound up, they are likely to be repaid the par or nominal value of shares ahead of ordinary shareholders.
Holders of preference shares are entitled to the following:
They stand rst in line to pro t from dividend payments.

These dividends are a routine occurrence – more regular and stable.
A share of the pro t a company has made during a nancial year.
Preferential treatment in the event of a liquidation claim.
Preference shares have fewer price uctuations and are less volatile than ordinary shares.
Preference shareholders cannot vote at general meetings.
More conservative investors seem to be fond of preference shares. Assisted and supported by their Financial Advisers, these investors
are bound to select shares that o er value, have growth potential and have a history of paying regular and high dividends. These
investors do not have the same objective as traders (who deal in ordinary shares), as they are primarily focused on steady growth and
protection. The concerns for being involved and gaining experience are not overwhelmingly part of this investor’s strategy but
conservative investors appear to invest larger amounts.
Cumulative Preference Shares. Cumulative Preference shares give holders the right that, if a dividend cannot be paid one year, it will be
carried forward to successive years. Dividends on cumulative preference shares must be paid, despite the earning levels of the
business, provided the company has distributable pro ts.
Participating Preference Shares. These shares are more expensive than Preference Shares. The shareholder shares in the pro ts of the
company, based on predetermined formulae and receives dividends similar to ordinary shareholders.
Convertible Preference Shares. These shares are exible in that the holder receives a xed annual dividend that he may exchange all or
part of his holdings in the company for other securities usually on a previous speci ed term.
Redeemable Preference Shares. The redeemable clause assists the company in the structuring of its capital requirements. The
shareholder receives a xed annual rate of dividend that is redeemable at the option of the company at a speci c price, on a speci c
date, over a speci ed period.
A Combination of Preferences Shares. It is possible to have non-cumulative, convertible participating preference shares. This implies
that such shares are xed interest-bearing securities that also share in pro ts, but in a non-cumulative way. They are also convertible
into ordinary shares on previously speci ed terms on speci c future dates.
4. “N” Shares
“N” Shares are similar to Ordinary shares except for the fact that the holders of these shares have no voting power. Companies issue
these shares as a mechanism for raising capital, without diluting the voting powers of the founding shareholders. N-Ordinary Shares
often trade at a discount to Ordinary Shares. Although they are likely to cost less, they pay out the same dividends as Ordinary Shares.
Dividends
The fundamental approach argues that investors value the dividends the stock will pay. More generally, they value the income from the
stock.
Dividends are a percentage of its annual pro ts that a company pays to its stockholders as income. That percentage is called the stock’s
payout ratio. Well-established companies are more likely to pay higher dividends than smaller or growth- oriented companies that often
prefer to use their pro ts to fund additional expansion.
The fundamental price of a stock may uctuate for two reasons:
Expectations about dividends may change, or the required rate of return may change. That is, future cash ows may vary, or the way
investors value those ows may vary. It’s common knowledge that slow dividend growth may depress a stock’s price, but it is also
true that uncertainty about those dividends or an increase in bond and bank rates can have the same e ect.
The Board of Directors decides if it will declare a cash and/or stock dividend and the date associated with it.
How can you try to predict what the dividend will be before it is declared?
Many companies declare regular dividends, so if you look at the last dividend paid, you may be able to guess what the next dividend will
be. Financial listings show the dividends declared by Boards of directors the previous years, along with their dates. Other companies
declare less regular dividends, so try to look at how well the company seems to be doing.
Some companies may not pay dividends on their stock, usually because they are not doing well, or because they want to retain the
earnings.
Dividends do matter over the long run! Currently, investors, for the most part, don’t care too much about dividends. That’s a shame since
dividends, historically, have mattered greatly to a portfolio’s total-return potential. When choosing stocks, don’t completely ignore
dividend-growth potential!
Indeed, during volatile market periods, the dividend return may be the only return you will ever see!
Dividend Dates: Any dividend that is declared, must be approved by a company’s Board of Directors before it is paid. For public
companies, there are four important dates to remember regarding dividends.
Declaration date: is the day the Board of Directors announces its intention to pay a dividend. On this day, a liability is created and the
company records that liability on its books; it now owes the money to the stockholders. On the declaration date, the Board will also
announce a date of record and a payment date.
In-dividend date: is the last day, which is one trading day before the ex-dividend date, where the stock is said to be cum-dividend (‘with
[including] dividend’). In other words, existing holders of the stock and anyone who buys it on this day will receive the dividend, whereas
any holders selling the stock lose their right to the dividend. After this date the stock becomes ex-dividend.
Ex-dividend date: is usually set for stocks two business days before the record date. If you purchase a stock on its ex–dividend date or
after, you will not receive the next dividendpayment. Instead, the seller gets the dividend.
If an investor buys a stock before the ex-dividend date, then they will receive the dividend payment. If they purchase the stock on or
after the ex-dividend date, then they are not entitled to receive the dividend. On the ex-dividend date, a rm’s share price usually
declines to re ect the amount of the dividend paid. For example, if a stock is trading at R100 and pays a quarterly dividend of R3 per
share, then, all other things being equal, the stock will open on the ex-dividend date at R97.
4 Stages of a share price
The market can only move in three directions:
UP
DOWN
SIDEWAYS
It tends to move in a predicted cycle, which is known as the four stages of a share price.
The rst stage is called the Accumulation stage. In this stage the price action is a sideways channel and is caused by major market
players (big buyers, institutions and fund managers) who are need to purchase large volumes of the share/currency without
in uencing the price driving it higher and raising their cost basis . To avoid moving the share price up when purchase in such a large
volume, they break down their large buy into many smaller buys. They make a buy that supports the price and causes the price to
increase slightly and then wait for traders to sell out for pro ts causing the price to drop back to their original purchase price. Once the
price reaches their desired entry level again, they make another large trade. They do this repeatedly until they have purchased the
volumes they are needing.
The second stage is called the Markup stage. This is where the price breaks out from the support and resistance of the accumulation
stage and rises in an upward trend. Institutions and individuals that did not buy in the accumulation stage now rally to buy in causing a
breakout through the resistance level and there is a spike in volume. This attracts the attention of more buyers who drive the price
even higher in an upward trend.
The price reaches its top, known as the Distribution stage, where the institutions and buyers who entered in the accumulation stage now
exit their trades for pro t. This stage is recognised by an increase in volume without an increase in price as new buyers absorb the
selling, trying to keep the price in an upward trend. This results in a sideways price movement.
Finally with the major players having sold out their positions and no new buyers entering the market, those who entered in the
distribution stage start to exit trades as prices fail to continue upward causing a breakout in a downward trend. This is the Markdown
stage as prices drop reaching a strong support level again and the cycle starts over.
Knowing how to identify the stage of the market will assist you in knowing which direction to trade in.
Trading Account Margin
The trading account margin is the available funds you have in your trading account to trade with. This is a ected by open positions
(trades).
It is important to understand that your funds are determined by your current position in trades. This means, if you start with a trading
balance of USD1000 and you enter a trade that costs USD100 of your balance, your trading account margin will be USD900 as you only
have USD900 remaining in which to place further trades.
However, your margin balance will be a ected by open trades. In other words, if you entered a trade using USD100 of your margin, if the
price rises and you are in a position to sell at a pro t of USD50, at that time your trading margin will be USD950. (USD1000 - USD100 buy
+ USD50 pro t). Should your trade go against you and you are in a position where if you closed the trade you would lose USD50, your
current trading account margin would be USD850. (USD1000 - USD100 buy - USD50 loss). Should you want to enter another trade, you
will only have USD850 available with which to trade.
Your trading margin therefore takes your open positions current pro t/loss into account.
Should you be in trades that are moving against you and you are in a position where closing your trades will be less than the initial trading
funds you had when you opened your trades, you will move into what is called a Margin Call. This means you are now in a position where
you have lost more money than you had to trade with and will need to fund your trading account to continue trading.
Trading Fees
There is a cost to trading. A brokerage rm charges a fee to the trader to execute trades, this is a commission that the trader pays in
order trade through the brokerage rm on the stock market.
This is called a brokerage fee on shares or a spread on forex.
A brokerage fee charge on trading shares is a percentage that is determined by the broker and di ers from broker to broker. It is
calculated as a percentage on the exposure (quantity of shares x share price).
For example: If the brokerage rm charges 0.57% brokerage fee and you purchase 100 shares at USD10 per share, you will pay 100 x 10 =
1000/0.57 = USD5.70 brokerage fee
When trading forex the spread is determined by the di erence in the ASK (sell) price and the BID (buy) price of a currency pair and di ers
between brokers.
For example: if you were trading the EURUSD currency pair with an ASK price of 1.10869 and a BID of 1.10889, the spread would be
1.10889 - 1.10869 = 2 pips (a pip is the smallest unit of currency)
Additionally, if you stay in a trade overnight you will be charged interest on the trade exposure which is called "swaps". This is a daily
interest charge and will be deducted or added to your cash value in your trading account. If you are trading in a long position you will pay
the swaps whereas if you are in a short trade, the swaps will be paid to you. Swaps are charged on both shares and forex trades.
Technical Analysis
Technical Analysis is a trading tool employed to evaluate shares/currency pairs and attempt to forecast their future movement by
analysing statistics gathered from trading activity, such as price movement and volume. Technical Indicators within the analysis are
used to analyse the market.
An indicator is a mathematical calculation based on a security’s (share’s) price and/or volume. The result is used to predict future prices.
Common technical analysis indicators are the moving average convergence-divergence (MACD) indicator and the relative strength index
(RSI).
Technical indicators, collectively called “technicals”, are distinguished by the fact that they do not analyse any part of the fundamental
business, like earnings, revenue and pro t margins. Active traders in the market use technical indicators most extensively, as they are
designed primarily for analysing short-term price movements. To a long-term investor, most technical indicators are of little value, as
they do nothing to shed light on the underlying business. The most e ective uses of technicals for a long-term investor are to help
identify good entry and exit points for the stock by analyzing the long-term trend.
Fundamental Analysis
Fundamental Analysis is the study of economic data and reports of a country. There are various reports each showing the di erent
economic aspects of a country. These include employment rates, in ation, productivity, trade and growth. Reports are released at
various times throughout the nancial year, some weekly and others quarterly.
Di erent markets will respond di erently to the various reports.
Fundamental analysis is an important way to understand the markets movements as it is comprised of aspects that a ect the market.
Market sentiment, being how the traders are feeling and reacting to news a ecting the market, can in uence prices to increase or
decrease, depending on the news. Reactions to economic reports can also create spikes in market prices.
See image below representing examples of how economic data is released. This is speci c to currencies viewed in an economic
calendar. Refer to the fundamental analysis module for more detail on fundamental analysis.
Quantity, Risk and Reward
Position size is an important aspect of any trade. Position size is the quantity of units of your trade.
The smaller your position size, the smaller the pro t you will make should your trade be pro table. Should your trade go against you, you
risk will also be a smaller loss.
The larger your position size, the greater the pro t you stand to make should your trade move in the predicted direction. However,
should your trade move in the opposite direction, you will make a larger loss.
Position size is part of a trader's strategy and is determined by the risk the trader is willing to take.
Never risk more than you are willing to lose in a trade. Keep the size of your trade relevant to the loss you are prepared to risk.
Time Frames
A time frame is a time period that the trader chooses to view his chart.
Even though traders may be trading the same instrument, they may be looking at a di erent time frame. Short-term traders look more at
a 1-minute to 15-minuted currency chart, whilst long-term traders look more at daily to monthly charts.
Trends, support and resistance lines etc appear di erent on di erent time frames. Eg you may look at a 1-minute chart of the EUR/USD
and see that the pair appears to be in a down trend. If you switch your chart to a daily chart, however, you may see that the currency pair
has been in an uptrend.
The following is a list of common time frames:
1-minute
5-minute
15-minute
30-minute
1-hour
4-hour
1-day
1-week
1-month
See example below of timeframes
The Importance of Multiple Time Frame Analysis
Multiple time frame analysis is comparing di erent time frames on the same currency pair. For eg, look at the currency pair on a 5-
minute chart, then on a 30-minute chart and on an hour chart. What may appear to be a short trade on one time frame could appear as a
long trade on another time frame.
Using multiple time frames assists too:
A trader uses multiply time frames in order to con rm whether to enter or exit and the direction of his trade.
Key levels of support and resistance may exist near your trade, but that can’t be seen on the time-frame you are trading on.
The trend may appear di erently on two di erent time-frames.
You can make a much more precise entry point on shorter times than on longer ones.
It is therefore important to check other time frames when wantingto place a trade, depending on if you are a long term or short term
trader.
When selecting a longer time frame you are more likely to have an easier way of identifying of the support, resistance or trend on your
share/currency pair.
Long and Short Trades
Trading the stock market can be done by placing two kinds of trades:
A Long trade (going Long)

A Short trade (going Short)
This means the direction you are going to trade in.
You would enter a long trade when you are predicting the price to rise. Therefore a long trade is buying low and selling high.
For example, you buy 10 shares at USD10 per share. This trade costs you USD100 to enter. The price rises to USD11 per share and you
close your position selling at USD11 per share. You would make USD10 pro t on your trade. (USD1 per share).
A short trade is entered when you are predicting the price to drop. Therefore a short trade is selling high and buying back low
For example, you sell 10 shares at USD10 per share. This trade costs you USD100 to enter. The price drops to USD9 per share and you
close your position with a buy at USD9 per share. You would make USD1 pro t per share being a total trade pro t of USD10.
Watch the below two videos to understand a long and a short trade.
01:56
02:19
Call and Put Options
Traders trading Warrants will use the Call or Buy option to trade the underlying stock positive and the Put or Sell option to trade the
underlying stock negative.
Traders don’t need to own the stock in order to trade Call (Buy) or Put (Sell) the underlying stock. When you buy a put option, you are
buying the right to sell the stocks.
Quantities will always be in lots of 100 shares. Where on the equities you can buy 1 share min. If the share cost USD10 you will be exposed
to USD10 x 100 shares = USD1 000, 00.
Bid and Ask
When trading, there are always two prices quoted on a share/currency - the price buyers are willing to pay and the price sellers are willing
to sell at.
Bid and Ask is a very important concept that many traders overlook when trading. Buyers and sellers place their orders and are matched
on a continuous basis. It is important to note that the current stock price is the price of the last traded price. As stated, the bid and ask
are the prices that buyers and sellers are willing to trade at.
There is no guarantee when a bid order is placed that the trader placing the bid will receive the number of shares, contracts, or lots that
they desire. Each transaction in the market requires a buyer and a seller, so someone must sell to the bidder for the order to be lled and
for the buyer to receive the shares, contracts or lots.
In order to understand Bid and Ask one needs to understand what Market Depth is and how it a ects placing either a Bid or Ask.
Market Depth
Market depth refers to the varying pricing levels of orders based on an individual security or currency pair. It shows the number of orders
lined up to either buy or sell.
Refer to the visual representation of buy and sell orders for a particular security at varied prices. The chart illustrates both sides of
supply and demand to show how much of the security you can sell at a particular price.
The Bid Price
The Bid price is the highest price that a trader is willing to pay at that moment. Share prices can change quickly as investors and traders
act on market news. These actions are called current Bids. Current Bids appear on the Market Depth of trading platforms. Most trading
platforms show 5 levels of all current bids. The Market depth also shows how many shares or contracts are being bid for at each price.
The highest Bid price will be rst in the 5 levels. This will change quickly as investors act on market news.
Bid Price Example
If the current bid on a currency is 126.496, a trader might place a bid at 126.494 or below this price. If the bid is placed at 126.494, all
other bids above it must be lled before the price drops to 126.494 and potentially lls the 126.494 order.
The Ask Price
The Ask price is the lowest price someone is willing to sell a stock for. It changes frequently as traders react on market news. The Ask
price is a fairly good indicator of the value of shares, contracts or lots at a given time. These actions are called current Asks. Current Asks
appear on the Market Depth of trading platforms most showing 5 levels of all current Asks. A trader must buy from the seller so that
orders can be lled.
Ask Price Example
If a current stock o er is 126.507, a trader might place a bid at 126.507 or above this price. If a bid is placed at 126.510, all other o ers
below it must be lled before the price moves up to 126.510 and potentially lls the 126.510 order.
The Bid-Ask Spread
If a bid is $10.05, and the ask is $10.06, the bid-ask spread is $0.01. However, this is simply the monetary value of the spread. The bid-ask
spread can be measured using ticks and pips—and each market is measured in di erent increments of ticks and pips.
Traders have a number of options when it comes to placing orders to buy or go long. They can place a bid at the same current bid price,
below, or above the current bid. A bid above the current bid may initiate a trade or act to narrow the bid-ask spread as orders above the
selected price are lled. A bid on the same price could add to the volumes and you need to wait till lled. A bid below the rst Bid may
result in your Bid to be second in line.
Execution at Market
A market order is also an option. It is an order placed by a trader to accept the current price immediately, initiating a trade. This is used
when a trader is certain of a price, or when the trader needs to exit a position quickly.
Exiting a trade at Market
When traders want to Exit the long position, certain options can be followed. Immediate exit of the long position by way of a market
order is used. A Sell order will execute at the bid price. One can also place an Ask at the same or above the Ask price. An Ask price
above the current Ask may initiate a trade or act to narrow the bid-ask spread. An Ask on the same price could add to the volumes and
one would need to wait until lled.
Market Order Explained
A market order is a buy or sell order which is immediately executed at the best available price in the market. A market Buy order will
immediately be executed at the market Ask price. A market Sell order will immediately be executed at the market Bid price.
Limit Order Explained
A limit order is placed in the market at the limit price and can only be executed at the limit price.
If a limit Buy order is entered, the order will be executed if the price is equal the market Ask price. If it is lower than the Ask price, it will be
placed in a queue behind any existing limit buy orders with the same price. The opposite applies for limit sell orders.
Stock Market Sectors
Stocks/shares can be divided into di erent types of sectors. The reason stocks are divided into sectors is because di erent stocks
thrive based on di ering market conditions.
For example, the consumer goods sector is largely considered to be 'recession proof' since consumers will always have to buy toiletries
and food.
A diversi ed portfolio is not only split amongst stock and other investments but also across di erent (or at least several) sectors of the
stock market
We will go over each major sector in the stock market as well as give you some ideas of what sort of companies you can expect to nd
in each of these sectors. You will also discover what situations could make prices in this sector rise or fall across the board so you can
learn how to invest more intelligently.
By investing in more than one sector on the stock market, you can help reduce the risk of your portfolio dropping due to economic
conditions or new government regulations.
Regardless of stock sectors, picking good companies to invest in, is always the best decision. Learning how to invest in the stock market
involves solid research into particular companies before investing. If you cannot nd a good company in a sector, there is no need to
force investing there when there are other sectors to choose from.
Basic Materials
Basic materials refers to the most commonly traded commodities on the stock market, such as oil, gold, silver, gas, and copper. All metals
fall into this category, as do many chemicals, which are too numerous to list.
Not only does this sector include the actual commodities, but it also involves companies, which specialise in harvesting them, such as
gold mining companies or oil drilling corporations. The stock prices of companies that drill or mine for basic materials are highly
dependent upon the price of the materials themselves, which makes them part of this sector.
Examples of companies listed in the Basic Material sector on various stock exchanges:
Consumer Goods
Consumer goods include everything from food and drinks to toilet paper. Anything people buy from retail shops or a grocery store would
t into this category. Note that this stock market sector is so broad it can be a little misleading. Consumer essentials like toilet paper and
food stocks tend to be stable in recessions, whereas other parts of this sector such as recreational goods can fall during this time.
Examples of companies listed in the Consumer Goods/Cyclicals Sector on various stock exchanges:
Financial Sector
The Financial sector would be the largest stock market sector. This includes banks and investment companies. Financials do very well
when the economy is doing well, and tend to do very poorly when the economy is doing poorly.
Examples of companies listed in the Financial sector on various stock exchanges:
Health Care
When it comes to the stock market, the health care industry is not nearly as big as you might think. This may be due to the fact that
Universities, which are not publicly traded companies, own many hospitals.
Nearly the entire Healthcare stock market sector is made up of drug manufacturers. After that, bio-tech companies and companies who
produce medical equipment make up nearly the rest of the entire sector. Hospitals, research, and diagnostics make up a very small
minority of the healthcare sector when it comes to the stock market.
Examples of companies listed in the Health Care Sector on various stock exchanges:
Industrial Goods
The industrial goods sector is propped up by three major industries: construction, equipment and export. Giants in this industry include
companies like Murray and Roberts and Group5.
Given that Government prop up a large portion of this industry, recent construction cuts aimed at trimming the SA de cit can a ect
stock prices.
Additionally, many companies in this category are big exporters, so the world’s economic state can have a big in uence on their value.
For example, companies like Murray and Roberts do construction in countries around the world, so if those countries are doing well, so
will Murray and Roberts, regardless of the state of the economy.
Examples of companies listed in the Industrial Sector on various stock exchanges:
Consumer Services
While the Consumer Services sector provides a lot of jobs in industrialised nations, the actual contribution of this sector to the stock
market is relatively low compared to the giant basic materials and nancial sectors.
This sector includes practically every shop or service you might use, from the grocery store to your accountant. This sector is also very
broad and rarely rises or falls across the board. As an example of this, sporting goods stores will go under during a recession whereas
grocery stores can often realise a lot of growth. People have to buy food but do not need to buy sporting goods.
Examples of companies listed in the Consumer Services Sector on various stock exchanges:
Technology Sector
The technology sector is very popular amongst investors given the propensity for companies to grow very rapidly in a short amount of
time.
Any company, which creates computers, cell phones, software, or related parts ts into this category. Note that Internet service
providers and many other internet-based software or services t into the technology sector, rather than the services sector.
While all sectors tend to be based on the performance of the overall economy, individual technology stocks have a history of being very
volatile and you really need to research companies well before investing in them.
Examples of commodity companies listed on the various stock exchanges:
Construction Sector
Construction is a category of stocks that relates to producing goods used in construction and manufacturing.
This sector includes companies involved with industrial machinery, tools, construction, waste management, manufactured housing and
cement and metal fabrication. Performance in the industrial goods sector is largely driven by supply and demand for building
construction in the residential, commercial and industrial real estate segments, as well as the demand for manufactured products.
When the economy declines and consumers save more and spend less, activity in this sector drops because companies postpone
expansion and produce fewer goods. With the industry covering a wide range of subsectors, there is usually at least one area of growth in
the industrial goods sector. Many of the sub-sectors go through positive growth cycles lasting for years before seeing a decline.
Examples of commodity companies listed on the various stock exchanges:
Financial Services Sector
The insurance sector is made up of companies that o er risk management in the form of insurance contracts.
Examples of companies listed in the Financial Sector on various stock exchanges:
Travel and Leisure Sector
This is a diverse division. Stocks include pubs, restaurants, hotels, buses, airlines and fast food delivery services. This sector bene ts
from GDP growth, globalisation and political changes.
Examples of companies listed in the Travel and Leisure Sector on various stock exchanges:
Energy Sector
The energy sector is a category of stocks that relate to producing or supplying energy. This sector includes companies involved in the
exploration and development of oil or gas reserves, oil and gas drilling and re ning, or integrated power utility companies including
renewable energy and coal.
Examples of companies listed in the Energy Sector on various stock exchanges:
Pharmaceutical and Biotechnology Sector
The pharmaceutical and biotechnology industry produces drugs and other products that help people and animals. Biotechnology,
or biotech, is the use of biological research techniques to develop products and processes derived from living organisms.
Examples of companies listed in the Pharmaceutical and Biotechnology Sector on various stock exchanges:
Telecommunications Sector
This industry within the sector of information and communication technology is made up of all telecommunications telephone
companies and internet service providers.
Examples of companies listed in the Telecommunications Sector on various stock exchanges:
Real Estate Sector
The Real Estate sector refers to a residential, commercial and industrial real estate. It focuses on buying and selling property, homes and
commercial properties eg factories.
Examples of companies listed in the Real Estate Sector on various stock exchanges:
Tobacco Sector
The Tobacco sector comprises those persons and companies engaged in the growth, preparation for sale, shipment, advertisement and
distribution of tobacco and tobacco-related products.
Examples of companies listed in the Tobacco Sector on various stock exchanges:
Media Sector
Media companies develop, produce and distribute multimedia content on TV, radio, in print and online. Television networks, cable TV
providers, production studios and social media companies may all be included in this sub-sector.
Examples of companies listed in the Media Sector on various stock exchanges:
Forestry and Paper Sector
The Forestry and Paper sector includes manufacturers of all forest-related products, including paper.
In a positive market forestry and paper stocks rank higher as they are tied to development and production in the economy. However, as
technology progresses and more industries go paperless or use recycled materials, the call for paper-based products may begin to
decline.
Examples of companies listed in the Forestry and Paper Sector on various stock exchanges:
What Instruments are traded in the financial markets?
There are di erent types of nancial instruments that are traded in the nancial markets. Throughout the duration of this course we will
discuss each one in detail:
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3/24/2021 The Stock Market and Concepts of Trading

The Stock Market and Concepts of Trading

Site: Stock Market College Printed by: Letladi Paul Lamola

History of the Stock Market

What is the Stock Market?

What is a Stock Exchange?

Supply and Demand

Stockbroker vs Online Trader

Why trade the stock market – investing vs trading

Bull & Bear market

4 Stages of a share price

Trading Account Margin

Quantity, Risk and Reward

Long and Short Trades

Call and Put Options

Bid and Ask

Stock Market Sectors

What Instruments are traded in the nancial markets?

History of the Stock Market

What is the Stock Market?

What is a Stock Exchange?

Advantages and Disadvantages of an Exchange

Advantages of Trading on a Stock Exchange:

The cost of trading compared to other investment vehicles is relatively low.

Disadvantages of Trading on a Stock Exchange:

Session Times for trading Shares/Derivatives and Forex

THE FOREX MARKET

Major Forex Session Times:

Supply and Demand

Why do Stocks or Currency Prices Fluctuate?

GREAT DEMAND = PRICES RISE

LOW DEMAND = PRICES FALL

Stockbroker vs Online Trader

Working through a stockbroker allows you to transact in three di erent ways:

A stockbroker is expected to:

Research the nancial markets before making a trade decision

However, in order to trade online you require:

a reliable internet connection

A trader is named by his appetite for risk.

Risk management is key when trading a leveraged instrument.

Let’s have a look at:

types of trader on the market,

Why trade the stock market – investing vs trading

Well done! Knowledge stash increased!

[stashdrop secret="aV64ww" text="Pick up!" image]

You’re now controlling usd10 000 with usd100.

Bull & Bear market

Bull Market = Upward trending market (Prices rising)

Bear Market = Downward trending market (Prices falling)

Someone who owns one or more shares is called a shareholder.

You can also call a share, ‘equity’ or ‘stock’.

The Share Price

These categories are usually determined by:

the amount of risk the investor is prepared to take,

Large Caps have a market cap of 10M or higher.

They stand rst in line to pro t from dividend payments.

The fundamental price of a stock may uctuate for two reasons:

4 Stages of a share price

The market can only move in three directions:

Trading Account Margin

This is called a brokerage fee on shares or a spread on forex.

Di erent markets will respond di erently to the various reports.

Quantity, Risk and Reward