When buying shares, the investor is actually buying into a company, and it is important to know as much as possible about that company.
A company’s value depends upon several factors, such as the socio-economic and political conditions in the countries where it operates (inflation, employment, taxation and more), market issues, such as the company’s market share, the demand for its product and the profit margins acceptable within the sector, and company issues, such as management, workers’ mentality, corporate environment, cost of production, and so forth.
The company’s SHARE value, on the other hand, depends upon all of these PLUS the market sentiment regarding that company.
Both of these can only be precisely calculated (usually by an entity related to the IPO’s underwriter) before an initial offering; where it goes for there is uncontrollable. From that point on, besides the company’s value, one refers to its market capitalization – the number of shares outstanding multiplied by the quoted value of each share.
Modes of investment
Besides simply investing in a company’s shares, there are several other methods of share trading.
Value Investing is a strategy used by traders seeking undervalued stocks and opening a long-term position.
Price-Earnings Ratio investing entails comparing a company’s P/E ratio to its earnings-per-share.
Another long-term strategy is investing in Dividend-earning stocks, where over the long term dividend payments are expected to cover the differential between a stock’s buy and sell value. This applies only to trading the shares themselves, as opposed to trading on share derivatives.
Day-trading, on the other hand, applies primarily to derivatives and may include swing trading – capturing trend movements and, to a lesser extent, scalping – capturing momentary aberrations from the trend. This latter, though, is rare, since shares are rarely volatile, except during quarterly earnings season.
Finally, Arbitrage consists of hedging shares of a specific company that are listed on more than one exchange. This entails opening a buy position where the price is low and a short where it is high, then closing as soon as the differentials equalize. Again, with the prevalence of electronic trading, these time slots are growing so small that mainly high-frequency traders can utilize them.