Download - Mechanism of stock trading
![Page 1: Mechanism of stock trading](https://reader033.vdocuments.site/reader033/viewer/2022051113/55cbd0d1bb61eb481e8b4878/html5/thumbnails/1.jpg)
Mechanism of
Stock Trading
A Simple story
![Page 2: Mechanism of stock trading](https://reader033.vdocuments.site/reader033/viewer/2022051113/55cbd0d1bb61eb481e8b4878/html5/thumbnails/2.jpg)
This is a storyOf, • How a company/business is formed• Buying and selling of shares• Rising and decline of share prices• Etc...
![Page 3: Mechanism of stock trading](https://reader033.vdocuments.site/reader033/viewer/2022051113/55cbd0d1bb61eb481e8b4878/html5/thumbnails/3.jpg)
Company/Business is formed
![Page 4: Mechanism of stock trading](https://reader033.vdocuments.site/reader033/viewer/2022051113/55cbd0d1bb61eb481e8b4878/html5/thumbnails/4.jpg)
Meet Siril.
Siril is a farmer. He understood the demand for
coconuts. He had an idea to start a coconut
plantation to meet this demand. So he bought some
land and equipment using a loan. The only problem
was that he lacked enough money to buy coconut
saplings. He had Rs 2,500 but the saplings cost
Rs.5,000. What could he do?
Company/Business is formed
![Page 5: Mechanism of stock trading](https://reader033.vdocuments.site/reader033/viewer/2022051113/55cbd0d1bb61eb481e8b4878/html5/thumbnails/5.jpg)
Initial Public Offering
for raising capital
![Page 6: Mechanism of stock trading](https://reader033.vdocuments.site/reader033/viewer/2022051113/55cbd0d1bb61eb481e8b4878/html5/thumbnails/6.jpg)
Siril
meets 5 good friends of his
“My friend Nimal, I want 500 rupees from you, But I’m not sure if I could pay it back as a loan. But I can promise you that I will give you a precentage of my harvest to you”
Nimal: “OK friend, I’ll give you the money...”
Initial Public Offering for raising capital
![Page 7: Mechanism of stock trading](https://reader033.vdocuments.site/reader033/viewer/2022051113/55cbd0d1bb61eb481e8b4878/html5/thumbnails/7.jpg)
What did Siril do?
He offers his friends a share of his business
Initial Public Offering for raising capital
![Page 8: Mechanism of stock trading](https://reader033.vdocuments.site/reader033/viewer/2022051113/55cbd0d1bb61eb481e8b4878/html5/thumbnails/8.jpg)
a Partner or
a Shareholder
![Page 9: Mechanism of stock trading](https://reader033.vdocuments.site/reader033/viewer/2022051113/55cbd0d1bb61eb481e8b4878/html5/thumbnails/9.jpg)
The coconut plants grew rapidly
1st year harvest = 100 coconuts
• As Siril paid 50% for the saplings.So he kept 50 coconuts and decided
to share the rest among the friends, 10 per each
• They can use or sell them
Distinction Between Being a Partner and Being a Shareholder
![Page 10: Mechanism of stock trading](https://reader033.vdocuments.site/reader033/viewer/2022051113/55cbd0d1bb61eb481e8b4878/html5/thumbnails/10.jpg)
A General Meeting was held by the investors
• They discussed weather they get their coconuts or ask Siril to sell them and give them the money
Decision made: – do the 2nd
• So Siril sold the coconuts and gave his friends the money received
Distinction Between Being a Partner and Being a Shareholder
![Page 11: Mechanism of stock trading](https://reader033.vdocuments.site/reader033/viewer/2022051113/55cbd0d1bb61eb481e8b4878/html5/thumbnails/11.jpg)
And also Siril issued a small note saying,
“Siril and Company” “You have one share guaranteeing you,
10% of the company’s profits”
Distinction Between Being a Partner and Being a Shareholder
![Page 12: Mechanism of stock trading](https://reader033.vdocuments.site/reader033/viewer/2022051113/55cbd0d1bb61eb481e8b4878/html5/thumbnails/12.jpg)
Trading occurs on Siril’s undervalued Shares
![Page 13: Mechanism of stock trading](https://reader033.vdocuments.site/reader033/viewer/2022051113/55cbd0d1bb61eb481e8b4878/html5/thumbnails/13.jpg)
Now Siril’s plantation is very much richer
Production : 500 coconuts
• He sells each for Rs.20 and he got a revenue of Rs.10000/=
Earnings of per share holder = Rs.1000
Siril buys more saplings with his Rs.5000/=• Those plants are also now productive and Siril
now owns a Rs.20000/= revenue creating coconut plantation
Trading occurs on Siril’s undervalued Shares
![Page 14: Mechanism of stock trading](https://reader033.vdocuments.site/reader033/viewer/2022051113/55cbd0d1bb61eb481e8b4878/html5/thumbnails/14.jpg)
Sunil, a neighbor of Siril,
sees this and wants to join in (More investors)
Nimal, who’s a share holder of Siril’s company
willing to sell his share
So Sunil likes to pay Rs.500 for the share (Bidding)
But Nimal, not a jerk, knows that this share earns Rs.2000 now (Earnings Per Share)
Trading occurs on Siril’s undervalued Shares
![Page 15: Mechanism of stock trading](https://reader033.vdocuments.site/reader033/viewer/2022051113/55cbd0d1bb61eb481e8b4878/html5/thumbnails/15.jpg)
Nimal
asks Rs.2000/= for the share
(Asking)
Sunil agreed and he buys the share for Rs.2000/=
(trading happens)
Trading occurs on Siril’s undervalued Shares
![Page 16: Mechanism of stock trading](https://reader033.vdocuments.site/reader033/viewer/2022051113/55cbd0d1bb61eb481e8b4878/html5/thumbnails/16.jpg)
A Bit of a
Bubble
Forms
![Page 17: Mechanism of stock trading](https://reader033.vdocuments.site/reader033/viewer/2022051113/55cbd0d1bb61eb481e8b4878/html5/thumbnails/17.jpg)
Oh, What was other share holders
were thinking???
“ Hey, what does Nimal just did? How did he made
money that much quick?We wanna sell too!!!”
Siril’s other neighbors : “We’d like to buy too!!!”
A Bit of a Bubble Forms
![Page 18: Mechanism of stock trading](https://reader033.vdocuments.site/reader033/viewer/2022051113/55cbd0d1bb61eb481e8b4878/html5/thumbnails/18.jpg)
Shares are trading...Now share price = Rs.5000/=
It is more than the earnings of Siril’s plantation
(now, shares are over valued)
A Bit of a Bubble Forms
![Page 19: Mechanism of stock trading](https://reader033.vdocuments.site/reader033/viewer/2022051113/55cbd0d1bb61eb481e8b4878/html5/thumbnails/19.jpg)
One loyal share holder -> Gayan
Buyers asks for Rs.6000 but he refuse to sell
Why?
He has a fixed income
A Bit of a Bubble Forms
![Page 20: Mechanism of stock trading](https://reader033.vdocuments.site/reader033/viewer/2022051113/55cbd0d1bb61eb481e8b4878/html5/thumbnails/20.jpg)
Oh no, Beetles
They destroyed whole one year’s production
Share holders are in troublebecause they used their savings to invest in
A Bit of a Bubble Forms
![Page 21: Mechanism of stock trading](https://reader033.vdocuments.site/reader033/viewer/2022051113/55cbd0d1bb61eb481e8b4878/html5/thumbnails/21.jpg)
Bubble bursts
![Page 22: Mechanism of stock trading](https://reader033.vdocuments.site/reader033/viewer/2022051113/55cbd0d1bb61eb481e8b4878/html5/thumbnails/22.jpg)
2 share holders, want money, sell their shares to Gayan for Rs.2000/=
(share price declined)
Now Gayan owns 3 shares of Siril’s company
Other share holders also want to sellBut, Gayan don’t need any.
Oh, They are in trouble
Bubble bursts
![Page 23: Mechanism of stock trading](https://reader033.vdocuments.site/reader033/viewer/2022051113/55cbd0d1bb61eb481e8b4878/html5/thumbnails/23.jpg)
Jayantha comes in to the sence
He offers Rs.1500 per share
2 share holders sell their shares to Jayantha Rs.1500 each
(share price goes down more and more)
Bubble bursts
![Page 24: Mechanism of stock trading](https://reader033.vdocuments.site/reader033/viewer/2022051113/55cbd0d1bb61eb481e8b4878/html5/thumbnails/24.jpg)
Demand is still there
Siril wants to start again
But he don’t have any money...
Bubble bursts
![Page 25: Mechanism of stock trading](https://reader033.vdocuments.site/reader033/viewer/2022051113/55cbd0d1bb61eb481e8b4878/html5/thumbnails/25.jpg)
Siril
Issues a
Bond
![Page 26: Mechanism of stock trading](https://reader033.vdocuments.site/reader033/viewer/2022051113/55cbd0d1bb61eb481e8b4878/html5/thumbnails/26.jpg)
Due to the tragedy happened,Siril do not want to issue more shares
He don’t wanna get a load either...
........................................
New Idea......
Siril Issues a Bond
![Page 27: Mechanism of stock trading](https://reader033.vdocuments.site/reader033/viewer/2022051113/55cbd0d1bb61eb481e8b4878/html5/thumbnails/27.jpg)
Why not sell some of his items?
He selects some crates to sell without actually selling them
(because he needs them back when the production resumed)
Siril Issues a Bond
![Page 28: Mechanism of stock trading](https://reader033.vdocuments.site/reader033/viewer/2022051113/55cbd0d1bb61eb481e8b4878/html5/thumbnails/28.jpg)
Call for Nimal from Siril....“Nimal, my good friend, I have an offer for you. I'll sell you my crates, which are worth Rs.5000 total, for a mere Rs.3000 and then buy them back next week for the full Rs.5000.“
Nimal thinks for a while and agrees
Deal is done
Siril Issues a Bond
![Page 29: Mechanism of stock trading](https://reader033.vdocuments.site/reader033/viewer/2022051113/55cbd0d1bb61eb481e8b4878/html5/thumbnails/29.jpg)
"But Nimal," Siril adds, "I don't want to run my crates down there and pick them up again. Can I just write up a piece of paper? It'll save my back."
"I don't know - can we call it a
promissory note?" Nimal asks enthusiastically.
"Sure can, but I was thinking more of calling it
a bond or a certificate," says Siril.
Siril Issues a Bond
![Page 30: Mechanism of stock trading](https://reader033.vdocuments.site/reader033/viewer/2022051113/55cbd0d1bb61eb481e8b4878/html5/thumbnails/30.jpg)
Insecticide applied -> beetles eliminated
And he pays Nimal as promised and re-own the crates
All are back to normal
Siril Issues a Bond
![Page 31: Mechanism of stock trading](https://reader033.vdocuments.site/reader033/viewer/2022051113/55cbd0d1bb61eb481e8b4878/html5/thumbnails/31.jpg)
What
we
learnt?
![Page 32: Mechanism of stock trading](https://reader033.vdocuments.site/reader033/viewer/2022051113/55cbd0d1bb61eb481e8b4878/html5/thumbnails/32.jpg)
This story may not explain everything about investing in stocks,
but it does highlight one very important point: ‘the price of Siril's stock followed investors' opinion of the stock's value rather than just the performance of Siril's company.
What we learnt?
![Page 33: Mechanism of stock trading](https://reader033.vdocuments.site/reader033/viewer/2022051113/55cbd0d1bb61eb481e8b4878/html5/thumbnails/33.jpg)
Because the stock market is an auction,
There is no set price for a certain stock,
There is a concept that derails most people's trains of thought:
the price paid for a stock is what it's
"worth" until a lower or higher price is offered.
What we learnt?
![Page 34: Mechanism of stock trading](https://reader033.vdocuments.site/reader033/viewer/2022051113/55cbd0d1bb61eb481e8b4878/html5/thumbnails/34.jpg)
This fluctuation of worth is good and bad for investors
– because it allows for profit (when you buy an undervalued stock)
– but also makes losses possible (when you pay too much for a stock).
What we learnt?
![Page 35: Mechanism of stock trading](https://reader033.vdocuments.site/reader033/viewer/2022051113/55cbd0d1bb61eb481e8b4878/html5/thumbnails/35.jpg)
Learn more about Stock trading
and Colombo Stock Exchange...
Logon to www.GuideToCSE.com