“How Do Buy Shares?”

In last week’s article I discussed whether you can invest in the share market now. My advice was basically that in order to really make money in the share market, you need to educate yourself first; and secondly, that you should start a business and invest in real estate as necessary steps towards investing in shares.

However, from the feedback I have received from readers, it seems like share market investing holds a lot of fascination for Papua New Guineans. As this column is about empowering readers with information to help them become financially literate and thereby make wise financial decisions, I have decided to provide the basic steps people go through in buying shares. This is for those who really want to buy shares. My advice on starting a business and buying rental property still stands.

Here they are the basic steps you will have to go through to buy shares in the Port Moresby Stock Exchange (PomSox):

Step # 1: Make contact with one of the stock brokers. Establish what type of services they provide, and the fees they charge per transaction.

Step # 2: Sign a client agreement and establish an account with the broker. The agreement states basically that you have authorized the broker to act on your behalf. The account opens the way for you to deposit funds which the broker will hold in trust for you and pay for the shares.

Step # 3: You place a “buy” order with stock broker. The order is either “at market” or “at limit”. A “at market” order tells the broker that the transaction is to be completed at or near the prevailing price of the particular share you are interested. A “at limit” order tells the broker that the transaction is to be completed at or within a specific price limit. Brokers usually charge different commissions for “at market” and “at limit” orders. Usually “market” orders are easier and cheaper to execute than “limit” orders.

There are also other (more exotic) types of orders. Examples include “stop orders” (which remain dormant until a certain price level is reached, when it becomes a market order.); “all or none” (the broker has to buy/sell the entire quantity of stock, or none at all; and “good till cancelled” (the order remains active until you decide to cancel it).

It is usually a requirement that the order is repeated so that there is no ambiguity as to what the broker is expected to do. Verbal orders must also be confirmed in writing (fax or email).

Step # 4: The order is placed on the market through a computerized (electronic) trading system. All participants in the market are connected to the exchange, so every time an order is placed; it appears on their computer screens. This makes the market transparent, and enables all the participants to see what is happening in the market. The system operates to match “buy” orders with “sell” orders. A trade occurs when “buy” and “sell” orders are matched by the electronic system.

Step # 5: Once a transaction is successfully executed, the broker sends the buyer a contract note specifying relevant particulars of the transaction, especially the number of shares bought and the price. The note also shows the broker’s charges.

Payment of the shares purchased and the brokerage charges are required to be settled within 3 days of transaction being completed. The broker draws on the buyer’s account to pay for the shares as well as receive his charges.

Step # 6: Once settlement is made, the broker arranges with the company’s share registry for the shares to be registered in buyer’s name. The registry is usually an independent organization which maintains the details of all the shareholders of companies whose shares are traded on the stock exchange. Previously share certificates were posted to owners. Today shares are usually kept on the registry.

The buyer is now a proud shareholder!

There may be some additional processes you are required to go through to buy shares, but the above 6 are the basic steps. You need to ask your chosen broker if there is anything else you need to do to buy shares.

The following are some of the privileges of being a shareholder:

1. You receive company updates including annual reports.
2. You attend annual general meetings and participate in decision-making.
3. You receive dividends if declared by directors.
4. You participate in dividend-reinvestment plans.
5. You receive other benefits such as discounts on company products or preference on new share issues.

Next week’s article will be on how to sell shares.

Send your comments to secos@global.net.pg or text me on 7688 0033 or 7280 4588.