Oran Hall | How to buy shares on the market
QUESTION: I am new to investing in stocks. I really need to know more about shares because I am considering buying some shares to reach certain goals in life.
FINANCIAL ADVISER: The capital stock of a company is divided into units called shares. There are preference shares and ordinary shares. The terms ordinary shares and ordinary stock tend to be used interchangeably. Their owner is generally called a shareholder and sometimes a stockholder.
The owner of a share of stock is an owner of the company, has voting privileges, and participates in its profits by receiving dividends.
Some companies list their stock on an exchange. The buying and selling of such stocks take place on the stock exchange, but stocks that are not listed also trade on the far less active over-the-counter, or OTC, market.
In buying stock, it is worth remembering that it is better to take a long-term posture. Buying with the intention of selling to make a quick return can lead to bitter disappointment.
Risks associated with common stock include the probability of the reduction in dividend income; the possibility of a complete loss in the event of the failure of the business considering that bond holders have a prior claim on assets in such circumstances; the adverse impact of the business cycle; and erratic and unpredictable price movements in the market.
Consider also that common stocks vary widely in quality, but a well-diversified portfolio of stocks tends to outperform other types of investment in the long run.
To buy or sell stock on the stock exchange, you should go to any of the stockbrokerage firms authorised to trade on the exchange. For a list of the stockbrokers, see the website of the Jamaica Stock Exchange: www.jamstockex.com.
Stockbrokers are able to advise you to help you make suitable decisions, but you must open an account with the brokerage company before you can transact business with them. You can find valuable information on how to open an account as well as the forms required to do so on their web sites. You will need to produce two references, proof of address, and your Taxpayer Registration Number.
Once you have chosen the stock you want to purchase, after careful research, you will indicate how many units you want, and the price you are willing to pay, but expect your broker to ask for a deposit of about 50 per cent of the cost of your order when you place it.
You may place a market order, which specifies the number of shares you want to buy or sell at the best available price. You may, however, place a limit order, whereby you specify the maximum price you are prepared to pay or the minimum price you are prepared to sell at. You may choose to place a day order, which is valid only for the day on which the order is placed.
Transactions are done on a cash basis, that is, you are required to pay in cash or by cheque for the stock you purchase and you must have clear ownership of any stock you are selling. Trading takes place on the Jamaica Stock Exchange from Monday to Friday, between 9:30 a.m. and 1 p.m., on a computerised platform. Transactions are settled three days after the execution of the order by your broker, referred to as 'T+3'.
The minimum size of orders varies. One broker, for instance, requires a minimum of $25,000, but others require less; another requires a minimum of 100 units of stock, but charges a minimum commission of $500. Once the order has been executed, your broker will issue a contract giving details, including commission and other charges, of the transaction.
Stockbrokerage companies charge a commission of about two per cent of the value of the transaction, and there are fees payable to the Jamaica Stock Exchange: a trade fee that varies, depending on the size of the transaction; and a cess, which is based on the value of the transaction. General Consumption Tax applies to all fees.
Although you may request a physical certificate, today's norm is for holding securities in electronic form, which is facilitated by the Jamaica Central Securities Depository (JCSD). This enables transactions to be processed by book entry. Your broker will set up an account for you at the JCSD from the information you provide to set up your broker account.
It is advisable to put all instructions to your broker in writing and to monitor your account regularly.
- Oran A. Hall, principal author of 'The Handbook of Personal Financial Planning', offers personal financial planning advice and counsel. email@example.com