Oran Hall | Questions on buying and selling shares
Question: I just read your column in The Gleaner of October 20, 2019. I found it very informative for someone who wants to understand the buying and selling of shares. I have some questions.
If I buy shares and do not sell them, would I lose?
How long after buying shares should I sell?
Should I always buy shares when asked by the company?
FINANCIAL ADVISOR: You will not lose if you do not sell the shares you buy. Share prices fluctuate: they increase and decrease. Of course, you can only make a profit if you sell at a higher price than the purchase price. In such a case, it is said that you realise your capital gains. If you choose not to sell, the positive difference between the market value of the shares and the cost is described as your unrealised capital gains or your paper profit.
On the other hand, if you sell below the purchase price, you suffer a loss. If you choose not to sell at the lower price, you suffer no loss. In this case, what you have is an unrealised loss, also called a paper loss. You only lose or gain when you sell.
There is no rule on how long you should keep your shares before selling them. It is up to you. After trading, your broker allocates the shares that trade. The broker may allocate to you all the shares you ordered, but you may get only some, or none, depending on the amount that traded, the price or prices at which they traded, the price at which you asked the broker to buy, and how many other buy orders they have to fill.
Bear in mind that you are required to pay for the shares within two business days of the order being filled so that they can be registered in your name. Certainly, you are free to sell after that.
There are several reasons why investors sell their shares. Some sell because the stock has reached the price they had determined to sell it at when they made the investment. Others sell because they are not satisfied with the performance of the stock, and others because the time they determined to sell it has come, perhaps to use the proceeds to realise goals they had set. And there are those who sell in panic when prices begin to fall. It does not always make sense to sell because prices are falling.
Ultimately, it is up to you when you sell, so it important to buy shares only with funds you are not likely to need in the short term and which you cannot afford to lose any portion of.
Generally, a company will sell its shares to the public in an initial public offering – not directly, but through a stockbroker. Other than that, if you want to buy shares, you will have to acquire them on the secondary market through a stock broker from someone who already owns them. This is one of the main reasons why the stock exchange exists. It provides a convenient and transparent mechanism for determining the price of the shares and for the change of their ownership.
There is no reason why you should always buy shares when a company offers them to the public. Your decision should be based on your assessment of the quality of what is being offered. If you do not have the skill and expertise to do that evaluation, you should consult a competent financial professional to give you the necessary guidance.
Sometimes companies reserve shares for their employees when they go public. They usually find a way to sweeten the offer to the employees. I would think twice before declining such an offer but would examine it as closely as any other offer.
When new issues come to the market, be careful to avoid the noise and hype. Take a sober approach when considering what to do. It is important to assess how well the company did in the past and how well it is likely to do in the future based on the present, the past, and the plans and outlook for the future. Looking at how well it is doing against the competition, its place in the industry into which it falls, how well it is able to operate successfully in the economy, and the quality of its management and board are also important considerations.
So it seems that you are beginning to have some interest in buying and selling shares. You have made a good start by reading a relevant newspaper column and going beyond that to ask questions. Continue to read. Listen to and watch relevant media programmes, talk to experienced and trusted investors, and become comfortable with your new interest to prepare you for the new adventure.
Oran A. Hall, the principal author of ‘The Handbook of Personal Financial Planning’, offers personal financial planning advice and counsel. Email firstname.lastname@example.org