What is the Stock Market? A Beginner’s Guide to Understanding Securities

DLMvn > Glossary > What is the Stock Market? A Beginner’s Guide to Understanding Securities

Introduction to the Stock Market

In recent years, many have become interested in learning what the stock market is and how to invest in it. The market has witnessed exponential growth in both the number and quality of investors, attracting both domestic and international participants.

This article will cover key concepts for beginners, including an overview of the stock market, basic terminology, and the benefits of investing in securities.

What Are Securities?

Securities, represent legal ownership or financial interest in a company’s assets or profits. Securities can be issued in two common forms: physical certificates or electronically recorded assets.

Types of Securities:

1. Stocks (Equity)
2. Mutual Fund Certificates
3. Bonds (Debt)
4. Warrants, Futures, and Options
5. Other securities as regulated by the Ministry of Finance

Example: If you own a stock in a company, you have a legal claim to a portion of that company’s assets and profits, which can be either in the form of dividends or capital appreciation.

Key Characteristics of Securities

High Liquidity

Liquidity refers to how easily an asset can be converted into cash without significantly affecting its price. Securities tend to have higher liquidity compared to other assets, which allows investors to buy and sell them relatively quickly on the market.

Example: Stocks like Apple or Google are considered highly liquid because they can be sold quickly in major exchanges at minimal cost.

Risk Levels

There are two main categories of risk in securities:

• Systematic Risk: This affects most or all assets in the market, typically due to macroeconomic factors such as inflation, exchange rate fluctuations, or interest rates.
• Unsystematic Risk: This type of risk affects only a specific company or a small group of assets. It is often linked to the performance of the issuing company.

Example: A recession can reduce the value of most stocks due to systematic risk, while a company-specific scandal only impacts that company’s stock due to unsystematic risk.

Profitability

One of the main attractions of securities is their profit-generating potential. Investors can earn profits from both annual dividends and the increase in the stock’s market price.

Example: A tech startup may see its stock price double within a year, offering significant profits for its early investors.

Common Terminology in Securities

Understanding the basic terminology is crucial for new investors to navigate the stock market more effectively. Below are some essential terms:

• Stock (Equity): Represents ownership in a company. For example, owning 1% of Apple stock means you own 1% of the company.
• Common Stock: Offers voting rights and dividends, depending on the company’s profitability.
• Preferred Stock: Usually does not offer voting rights but provides fixed dividends.
• Bond: A debt security, representing a loan made by an investor to a borrower, typically corporate or governmental.
• Capitalization: The total value of a company’s outstanding shares of stock, often used as a measure of a company’s size.

Example: A company like Microsoft has both common and preferred stocks, where common stockholders vote in shareholder meetings, and preferred stockholders receive fixed dividends.

Categories of Securities

Securities can be broadly classified into three main types based on their capital-raising characteristics:

Equity Securities

Equity securities represent legal ownership in a company and provide investors with voting rights, dividends, and a share in the company’s assets in case of liquidation. There are two main types:

• Common Stock: Provides voting rights and dividends.
• Preferred Stock: Offers fixed dividends but lacks voting rights.

Example: Common stocks in large Vietnamese companies like VinGroup allow investors to vote in shareholder meetings and receive dividends based on profits.

Debt Securities

Debt securities represent loans that must be repaid by the issuing entity (usually a corporation or government) at a set future date. Bonds are a common type of debt security.

Example: A 10-year government bond issued by the Vietnamese government pays interest annually and returns the principal upon maturity.

Derivatives

Derivatives are financial contracts whose value is derived from an underlying asset, such as stocks, bonds, or commodities. They include:

• Options
• Futures Contracts
• Forward Contracts
• Swaps

Example: Investors might use futures contracts to speculate on the future price of crude oil or a major stock index.

Benefits of the Stock Market

Benefits to the Economy

The stock market acts as a barometer for the economy, reflecting its strength and growth through indices and stock prices. Additionally, the stock market enables the government to monitor the economic health of companies and industries.

Example: During times of economic boom, stock indices like the VN-Index in Vietnam tend to rise, signaling a growing economy.

Benefits to Companies

For companies, issuing securities provides an alternative means of raising long-term capital, which supports business expansion and reduces reliance on bank loans.

Example: Companies like Masan or VietJet have used the stock market to raise capital for large-scale projects and expansion into new markets.

Benefits to Investors

For investors, the stock market provides a wide array of investment options that help mitigate risks through portfolio diversification. By investing in stocks, bonds, or derivatives, investors have the potential to earn significant returns.

Example: A diversified portfolio of stocks, bonds, and mutual funds can lower an investor’s risk while providing steady returns.

How the Stock Market Works

The stock market comprises buyers and sellers engaged in trading securities. These transactions can occur on formal exchanges such as the Ho Chi Minh City Stock Exchange (HOSE) or through intermediaries like brokerage firms.

Example: When a company like Vinamilk lists its shares on HOSE, investors can buy and sell those shares through licensed brokers or online trading platforms.

Stock Market Regulations

According to the Securities Law of Vietnam, stock market activities, including listing, selling, and trading of securities, must adhere to principles of fairness, transparency, and investor protection. These regulations ensure that both individual and institutional investors operate in a secure and efficient market.

Example: The State Securities Commission of Vietnam regularly monitors market activities to prevent insider trading and protect the rights of investors.

Conclusion

Understanding the stock market is crucial for both novice and seasoned investors. From knowing the types of securities available to grasping how the market operates, this knowledge can help investors make informed decisions and capitalize on opportunities. For those looking to get started, a solid foundation in securities terminology and market mechanics is key to success.