Sunday, October 31, 2010

What is a Stock Exchange?

Multaqa Al-Tadawul (The Trading Forum) is the brokerage house I use to manage my humble portfolio in the Amman Stock Exchange. What's a stock exchange anyway?

Let us assume your friend has a grocery store that makes good money. You like this idea, and instead of envying your friend, you offer to pay him/her and become a partner in this business. So, a helpful accountant evaluates the worth of this store to be $1000 and divides this value by a suitable number of portions (say 100 shares); now each share's value is $10 or alternatively each stock has a value of $10. You pay your friend $400 for 40 shares, voila you are officially a partner in this business.

One day you decide that this grocery store is not your cup of tea and you decide to opt out from it. You need to sell your shares, how do you do that? You need a market to put your shares in for sale and wait for a potential buyer, in other words you need a stock exchange. Trading in Amman Stock Exchange everyday is from 10:00 AM until 12:15 PM (except for Friday and Saturday). Each stock's price is allowed to move up or down within 5% of the last day's closing price. The Amman Stock Exchange website contains useful information, plus you can also use it to track stocks in real time via the market watch live link.

On the other hand a brokerage house is the link between you and the stock exchange. For every share you sell/buy, a small percentage of your deal goes both to the stock exchange and the brokerage house. For me I choose Multaqa Al-Tadawul because it has an e~portfolio service in addition to a very convenient trading commission (as low as %0.55). By the way opening a portfolio is usually free.

Pros of investing in stocks:
  • Stocks make good investment. Also, most brokerage houses require an affordable minimum balance to open a portfolio. For example I started my portfolio with only JOD 280 ($400).
  • Stocks helped me learn important business concepts (such as supply and demand) in a very simple way.
  • Trading stocks is prestigious, you get something useful to talk about in social events instead of gossiping. 
Cons of investing in stocks:
  • Some stocks might loose value dramatically due to a multiple of factors, one of which is bad news. For example, within 50 days, the BP oil spill resulted in 50% decline in BP share price.
  • Since stocks require finding a potential buyer/seller it might not be easy to liquidize your portfolio whenever you need to opt out and cash your assets. Otherwise you might sacrifice and give up some of your initial capital.
Be careful, trading stocks might be risky, in this post I only give you the starting point, but if you have any questions please feel free to leave me any. Stay tuned for my next post, I will give you my ultimate stocks' tips.
Fact of the day: New York stock exchange is the world's largest stock exchange, the daily trading of stocks in New York began under a buttonwood tree on Wall Street!
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