"Put some respect on my check, or pay me in equity" - Beyonce.
It's no news that Facebook's (Or Meta’s) stocks recently plunged heavily by 26.4%, causing the company to lose a whopping $230 billion (yeah, you read that right, B for billion), and its CEO, Mark Zuckerberg to lose $30 billion plus of his wealth. That’s a lot of money. And if you’re not sure how the stock market works, consider this an answer to prayers as we try to explain the nitty-gritties in the simplest way possible.
The word "stock" has become so popular with the likes of Facebook, Tesla and Netflix in the news almost every other day, with their stock prices constantly swinging up and down.
A stock, which is alternatively called equity, is a guarantee or security that symbolizes the ownership of a piece of a company. This gives the owner of the stock the right to a part of the company’s assets and profits equivalent to the value of their stock. Whenever you hear the word "shares", it refers to units of stock.
When a person buys stock in a company, they become a shareholder, meaning that they become part owners of the company. Assuming a company has 100 shares and you buy 20 units of its shares, it means you have access to 20% of the assets and profits of the company and this gives you access to 20% of dividends: reward for investing in the company. Think of it like sharing a 10-sliced box of pizza, owning 20% means you’re entitled to 2 slices.
Ever heard of crowdfunding? Well, it’s the same idea. Basically, Companies sell stock to raise money for their businesses. The same way you’d create a Go-fund-me account to meet certain pre-established goals, companies also sell stocks to raise money; which is usually used to expand their operations, take on new projects or for Research and Development. More money usually translates to higher productivity and higher profits which results in higher dividends.
Stay with me, I’ve got you. This is just another big word that the finance gurus like to use a lot, and it just means the tendency or likelihood of stock prices to change quickly and unpredictably. Now that we understand what volatility is, we also need to explain why it happens.
Typically, when there’s a high demand for a particular product or service, with a less than equal amount of supply for that product, the prices are likely to increase. The same thing happens with Stocks. It is usually affected by the confidence of investors on the ability of the company to keep making profits and produce large returns on their investment. When investor confidence is high, there’s a higher demand for shares, causing a hike in stock prices.
On the other hand, when investors have a negative perception of the company’s future performance, shareholders would seek to sell their shares, and when supply exceeds the demand, stock prices are most likely headed downwards.
Stock prices are also affected by a few other factors like government policies, natural hazards and the general performance of the industry in which the company operates.
1. Job security: You see, when stock prices are high, indicating that the business is doing well, the company might need more staff to keep up its performance. On the flip side, when things aren’t going well, they might need to cut down administrative expenses by firing workers, so they can remain profitable.
2. Indication of Economic Performance: The stock market often serves as a sign of a vibrant economy or the lack of it.
Stocks are bought and sold on stock markets like the National Association of Securities Dealers Automated Quotations (Nasdaq) or the New York Stock Exchange (NYSE). Following an initial public offering (IPO), a company's stock becomes open for investors to buy and sell on a stock exchange. In a recent article, we gave you the gist on MTN’s first digital public offering and how Young Nigerian Women are taking over. It is a worthwhile read.
You can buy stocks on the exchange using a brokerage account. This is where your favorite neighborhood superhero comes in - Kwakol Markets offers you the platform to access the Stock Market and trade stock. The best part is that kwakol offers fund managers to handle the technical stuff for you if you're not looking to do so yourself.
As for the ‘why’, it might interest you to know that recently, Warren Buffett’s company, Berkshire Hathaway bought about $14.7 million worth of shares in the gaming company, Activision Blizzard, when the company was worth $975 million. And in a few months, the company’s worth is now at about $70 billion. Berkshire now owns about $1.2 billion worth of stake in the company.
A stock represents ownership of a part of the company. A company sells stock to raise more money for the business.
Even though there are risks associated with the stock markets, there’s no hiding that there’s a lot to gain as well. And according to Neil Gaiman, “If you dare nothing, then when the day is over, nothing is all you will have gained.”