Unseen hands, mystic forces, bulls and bears — all combined this sounds like the making of some fantastic fairy tale. But no, in the context of capital markets all these are far more serious than that. These are some of the basic terms and concepts behind the workings of finance and the jargon of the community being explored in this column.
As the Jordanian capital market expands, modernizes and becomes more accessible to the ordinary investor, investing in the Amman Stock Exchange (ASE) has become easier than ever. Where once land or savings accounts were the only viable option for investing, the stock market, or capital market, offers some interesting and rewarding opportunities, say brokers.
According to ASE figures, the market has a capitalization or worth of over $3.5 billion and is one of the largest stock markets in the region permitting foreign investment. It boasts nearly 450,000 local shareholders and continues to expand its investment pool. Clearly this is something big, and indications point to it getting only bigger and more accessible with time.
What is a capital market?
In simplest terms, the capital market is like any other, with buying, selling and lending of funds with the consequence of profit or loss for those involved. If this capital market is vibrant and profitable, it can stimulate economic growth for the nation by allowing capital to be loaned in order to fund growing projects. Simply put, private money is at work helping things happen. Whereas money sitting in the bank or sunk into land sits idle, only making a difference for the investor at the time of withdrawal or sale.
Through a capital market like the ASE, borrowers are able to match up with lenders. However, financial markets differ from banks in one important aspect — while banks deal mainly with currency (money), capital markets deal mainly with securities and offer greater rates of return, but also with increased risk.
In general, securities can be divided into two main groups: Equities and bonds. Equities, or stocks, represent an ownership interest in a corporation, meaning, if you buy a company's stock, you own part of that company and are entitled to a share of its profits or losses. Companies usually choose to issue stock to raise much needed capital for growth, like hiring extra staff or investing in new equipment or building a new factory.
The first time a company chooses to issue shares for purchase by the general public, this is known as an Initial Public Offering (IPO). In recent years, IPO's of technology and Internet companies have drawn much attention as investors flock to cash in on the Internet revolution.
Bonds differ from equities in that they do not represent an ownership interest in the company. Bonds function like loans. Bond buyers receive interest payments from the bond issuer, which may be a corporation, government, or agency. Bonds are bought and sold with a maturity date or date of repayment.
As securities are bought and sold within the stock exchange, price is affected by a variety of factors, including supply and demand. Therefore, and investor's profit can be made through dividends of company profit or by the trading of the share itself, selling it at a higher price than what was originally paid.
While no one really knows exactly how a market will react at all times, here are a few basic concepts.
Ride out a bull and jump on a bear
Within financial circles, the market is revered for its almost human-like qualities.
The market reacts to events, like our current regional crisis. It falls prey to economic ills, like the flu, which in its Asian embodiment swept through various countries in the mid-90s. It also gets involved in politics, as seen through its distaste for the American presidential election fiasco and the resulting market slump.
The market is also known to smile on positive economic indicators, like employment and trade statistics, it can show confidence in peace proposals and it definitely seems to like the Internet and technology companies, which it elevates to incredible values, even when they don't actually make profits.
Generally like everyone else, the market likes peace, stability, good management, hard work and positive returns. When all this is in place, investors can look to the market and its trends with optimism and this is known as a bull market.
A bull in share trading is one who believes that the market will rise. Therefore, a bull market is an advancing market where share prices keep increasing as a result of positive factors. Brokers usually tell clients to ride the bull once invested in the market. Sit back and enjoy the increases but decide when to get off, before the inevitable turnaround happens.
When that change does come, it is known as a bear market or a market in a downward trend. Bears warn that share prices will decline and while not necessarily being pessimists, they look to as many market indicators as possible to objectively discern these trends.
But just as the glass can be half-full or half-empty, a bear market is also a good time to buy. As share prices drop, the time can be right to invest money in undervalued stocks waiting for the return of the bull and its hopes of profit. Many brokers currently view the Amman Stock Exchange in this light.
Conversely a bull market is a time to sell as investors wait out the trend long- enough to reach what they think is the peak, before selling and getting off. While financial investing is a science, there's also an amount of faith involved. Market indicators can only tell so much and in the long- run, no one knows the future, even the most highly trained experts.
Adam Smith, the Scottish economist, is the most influential thinker on the history of capitalist economics, a fact all the more remarkable in that he wrote in the earliest phases of the industrial revolution. His 1776 classic, `The Wealth of Nations,' explored the influence of the market force which for him, was guided by and “invisible hand.” Hardly scientific, but still probably one of the best descriptions of the market, its force and its maddening unpredictability in determining the `fair and just' price of things.
Smith argues for an unregulated economy, one where less government interference with business the more prosperous a nation will be. This idea of laissez-faire economics is still around today, with proponents of free trade and low taxation still carrying Smith's banner. They feel that ultimately, the market mechanism will benefit all society and cover its needs.
Jordan is moving towards an unregulated economy, with our free trade agreement with the US, entry into the World Trade Organization and the drive to privatize state industries. If all goes well, this can only mean improvement in our stock market.
While this is just the tip of the iceberg for investing, one golden rule cannot go unmentioned; stay informed, do your research and know your market. — ( Jordan Times )
By Owen Clegg
© 2001 Mena Report (www.menareport.com)
