An Overview of Stock Markets
Updated: Jul 2
Starter's pack - knowledge before investing or trading in the stock market.
In the previous article I mentioned 5 types of investments to look into and a brief introduction about those investments. Stock markets are one of them and here is a basic introduction into the stock market. If you have yet to read the previous article be sure to check it out after this.
So, have you ever had that dream that once you turn 18, you’re going to start trading in the stock market and become rich one day? Well, I have. I recently had my account created and attempted to trade. However, to my surprise it wasn’t as easy as you might think it is. Here I would like to share some information that I have learnt on how the stock market works in general.
What is a stock market?
A stock market is a place where there are many public limited companies listed on it. Each company issues a number of shares which can also be referred to as stocks. It is a place in which buying, selling and issuing of new shares takes place. Buying and owning a stock would mean that you own a fraction of the company, making you one of the owners. Under a set of rules, these activities are made through a formal exchange or over the counter.
Basics of Malaysia’s Stock Market
Every market has their differences in terms of opening times, regulations and etc. This part will be dedicated solely on the Malaysian market. The market operates between 9:00 a.m. and 5:00 p.m. with a break between 12:30 p.m. and 2:30 p.m. The market also has its pre-opening at 8:30 a.m. which is when you can start seeing its theoretical opening price. There is also a short 5 minute break between 4:45 p.m. and 4:50 p.m. A fixed price will only be traded between 4:50 p.m. until 5:00 p.m.
For Malaysia’s market, the settlement day will be T+2 which means Trading day + 2. So if you were to buy a stock on Monday, your settlement day will be on Wednesday provided that Tuesday or Wednesday isn’t a holiday. If there wasn’t payment on T+2, on T+3 unsettled stocks will be force sold. If there is a gain, you wouldn’t have to make any payment and if there is a lost you will have to pay up as well.
A standard lot in Malaysia is 100 shares as compared to the U.S. where it is just 1. Therefore when buying a stock, the price to pay would be:
Market price x 100 x number of lots + brokerage fee (depending on individual broker) + other fees.
However, companies would sometimes give bonuses which might not be in 100s. Those are called odd lots and don’t worry, there is a marketplace for you to sell them.
How are prices determined?
For each stock, there is always a "bid and ask price" in which the bid prices are made by the buyers while the ask prices are made by the sellers. Therefore, the price of each stock is determined by the market a.k.a buyers and sellers. This price movement is just like the demand and supply scenario in Economics; when the price is low, there tends to be more demand which in this case would mean more buyers and vice versa.
You might be wondering what is short selling? It is the act of borrowing shares and selling it at the current price and buying it again when the price goes down. Now you also might be thinking, wow you can do that? Yes, you can. However, it is currently suspended in Malaysia’s stock market if you are reading this on the day it is posted. It was said to resumed on the 31st December 2020. This method should also be used carefully as there is limited profit while having an unlimited risk.
Types of Order
Stock markets don’t have as many order types as compared to other types of market. You can only choose between market order or limit order. However, you might be wondering which option you should use to execute your order. Below is an explanation of each option.
Market Order – This is the simplest way as it just means trading by the market price. So if you are buying, it would be the ask price that you would be buying at. This type of order is done immediately.
Limit Order – This option is simple as well with the added flexibility of letting you select what price you would like to buy/sell at. For example if the stock price is at bid $1.05/$1.06 ask, you could choose to put a buy order at $1. If the price does drop to $1, your order will be completed if it reaches your position since there may be others queuing before you. This type of order doesn’t always get you what you want and sometimes may even fill your order partially before the price goes the other way around.
Don’t be afraid if you have accidentally typed in the wrong limit order. For example, price of the stock is $10.04/$10.06, you would like to buy the stock at $10. However, you accidentally typed in $100 instead. This doesn’t mean that you will be buying the stock at $100 but if it is above the market price, it will just be treated as a market order and give you the best possible price which would be $10.06.
That should sum up just about everything that I would like to share. Thanks for reading until the end of the article. If this has sparked some interest in trading and you would like to have a practical experience on the stock market itself, you can register an account with Rakuten by clicking here. By registering with this link, you will get 500 FREE points which can be redeemed for some rewards from its partners. However, I must say that this might not be the best broker and user friendly website, but it is definitely quicker to make an account with them.
Do also check out the previous article by clicking here if you would like to know the other types of investment opportunities.