What is Stock Market

CHAPTER 5:
WHAT IS A STOCK MARKET?
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Many people treat investing in the stock market as mainly trading pieces of paper or electronic tickets. But many do not really understand what the stock market actually is.

Assume you own a burger stall. Business is so good that you decide to set up another 100 burger stalls at the cost of RM1 million.

Now, you have basically three options to raise that capital.

First, you can dig into your own savings. If you don’t have enough savings, then you have to opt for the second option – bank borrowings. Well, easy as it may sound, the chances of getting a loan from the bank is pretty low. Even if, with luck, you are able to secure a bank loan, you will have the interest cost to deal with, which will increase your monthly fixed commitment.

Then comes the third option, which is: you thought of a way to invite, say, one thousand friends to invest RM1,000 each in your business. These one thousand friends then become co-owners of the business, sharing the profit and losses of your burger stall venture.

This is a basic concept of how the stock market initially started. The stock market is actually a place to allow business owners who need capital for expansion to raise capital (via Initial Public Offering). Adding to that, the stock market allows ease of change in ownership, which is unlike private limited companies. If one share-owner no longer wishes to be a part of the company, all he or she needs to do is to dispose the shares in the stock market.

Investing in Shares is Actually Investing in Business

What does the title mean? I usually give this example. Assume you like oil palm plantations very much and would like to own one.

Basically, you will face two challenges. First, you need at least RM20 million to buy an oil palm estate of a meaningful size – I believe most of us would not have that kind of money. Well, say one day you are lucky and strike the lottery and can afford the hefty price tag. You will then face the second challenge, which is to have the skillset to manage the plantation.

Now, with the aid of the stock market, you can address both problems.

Firstly, you don’t need RM20 million to own an estate. All you need to do is invest in a plantation company. The cost could be RM1,000 or even lesser, depending on the share price of the company. Even by just owning one share, you are one of the legal owners of the company.

Secondly, which is the best part, you get to pick and choose which companies to invest in. In Malaysia and even in the ASEAN region, there are more than 20 plantation companies that are listed on the stock exchanges. You get to choose the plantation companies that have the best tree age profiles and the best management.

You can continue with your day job, be it as an office clerk, webpage designer, or even a delivery man. Or you could be pursuing your passions, such as being an artist, a Youtuber, or even a composer. Once you invest in the company, the management is responsible to grow the company’s business for you.

Say a few years down the road, you decide that you no longer fancy oil palm companies and you now like companies involved in the Internet-of-Things. Had you owned a physical plantation estate, you might need to go through a long list of processes to dispose of your existing assets before having the capital to venture into another industry. You would need to find a willing buyer for your estate and let the potential buyer conduct due diligence on it. Then, both parties would have to negotiate the price, go through the Sales and Purchase terms and more, which may take years to be completed. After a year or two, you might not have even started on your new interest yet.

In the stock market, you can easily sell the shares of the plantation company that you owned and invest the proceeds into the Internet-of-Things company that you fancy. The company can be a local one, or you can even invest in companies based in the United States, China, South Korea, and even Germany.

I used to tell others that you can own Apple in two ways. You can either buy an iPhone, or you can buy Apple’s shares. Similarly, you can own BMW in two ways. Either buy the car or buy BMW’s shares.

Unfortunately, over the years, investors have ceased to treat the stock market as a place for them to scout for businesses to invest in, and instead see it as more of a gambling den.

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