Explaining The Stock Market To A 12-Year-Old Part 2

Posted by Fitz Villafuerte under Investing on December 17, 2009

This is Part 2 of the conversation I had with a 12-year-old about the stock market. You can read Part 1 here.

“So why would you buy a share of a company that doesn’t give dividends?” I repeated. “Because they can just suddenly decide to do so.”

“It’s a bit complicated but there is always a possibility that a business can give out dividends in the future and that’s always something that people hope for.”

“But more importantly,” I continued. “One more reason why you’d want to buy a share of a company, even if they don’t give out regular dividends is because there are other ways to make money from it.”

“Really?” the boy was more curious now as before.

“Yes, you can make money by selling your share of the company to others,” I replied. “But first, let me now explain to you what all these numbers in the newspaper are.”

“This table is a list of the public companies in the Philippines and how much a share of that company is worth,” I continued. “For example, if you look at this, you’ll see that a share in Jollibee (stock symbol: JFC) is currently worth around P53. Which means if you want to become a part owner of Jollibee, then you’d have to spend P53 for every share you want.”

“So with just P53 I can become an owner of Jollibee?” he was obviously delighted with that realization.

jollibee-sign

“Theoretically, yes. But the stock market has rules, depending on the price – there is a minimum number of shares you need to buy. For this price, it’s 100 shares. So that means you’d need to spend around P5,300 to become a part owner of Jollibee,” I explained. “Can you still follow me?”

“Yes.”

Update: The PSE has changed the “rules” and for a P53 stock price, the minimum number of shares you need to buy will now only be 10! Read more: PSE New Trading Rules

“Now, let’s say I bought 100 shares of Jollibee today at P53 per share. Then after a few months, the company announces that they’re planning to put up more branches in other countries.”

“That will be great news for me and all those who are shareholders of the company,” I explained. “Because it means that when it accomplishes that goal, Jollibee will be earning more money than ever before – which means the dividends that I might get as part owner will potentially be large.”

“Okay.”

“Knowing that news, wouldn’t you want to also buy shares of Jollibee?” I asked. “So you can also get dividends in the future and not just me?”

“Yes, of course,” he answered.

“So now, I’m in a very good position to earn. Because you and a lot of other people would want to buy shares of Jollibee, I can decide to just sell my shares. In doing so, I will forego receiving possible dividends in the future, but in exchange, I’ll be able to make some money now,” I explained. “Are you willing to buy my 100 shares for P55 each?”

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“Oh I get it now. You can decide to sell your shares at a higher price than how much you bought it. But what if I want to buy them at the same price as you did, P53” he said.

“You can, but you’d have to find someone who is willing to sell at that price,” I answered. “And in my case, I would have to find someone who will be willing to buy them at P55 per share.”

“So how would we do that?” he asked.

“Well, you go to the stock market and sort of announce it there. For me, I would also do the same thing. And the people in the stock market will automatically match the buyers and the sellers and process the transactions for us,” I answered.

philippine-stock-market

“And that’s why the newspaper publish this table everyday,” I continued. “Because people buy and sell their stocks everyday and these numbers tell how much the price of each share were bought and sold. It also says how many shares exchanged ownership, that’s what the number under the volume column means. This table also has a lot of other information of what happened today in the stock market.”

“Okay,” he replied intently.

“The prices change everyday. Sometimes it goes up, sometimes it goes down – there are many factors that affect it but at the most basic level – it’s dictated by how people feel about the particular company. When people believe that the company will do good, many will buy shares and the price can go up. But if they feel that the business will do bad, more people might sell their shares and that’s how the price could go down.”

“I see,” he said in a quiet manner. He was obviously getting information overload. Moreover, I already saw that my friend was about ready to go and we’d have to leave their house soon. And so I tried to end the conversation with an advise.

“You know, you’re quite lucky. I was able to understand the basics of the stock market when I was in college but you, you already know it and you’re just in high school.”

“Really?” his enthusiastic voice was back.

“Yeah, the stock market is actually an interesting place. And if you take some time to learn more about it, you’ll realize that it’s a good way to make money.”

And with that note, our conversation ended.

Interestingly, as I told my friend about what me and his son talked about, he also became interested and asked me if I can help him learn more about the stock market.

Of course I said that I would, but he’d have to read my blog for that. 😀

So if you’re like my friend, who’s interested to learn more about the stock market, as well as other ways to invest and make money, then join him and subscribe to Ready To Be Rich.

———
Photo credit: scion_cho and Katrina.Tuliao


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19 Responses to “Explaining The Stock Market To A 12-Year-Old Part 2”


  1. […] 3 Essential Skills That Every Entreprenuer Should Master Explaining The Stock Market To A 12-Year-Old Part 2 […]

  2. Dinah says:

    thanks for this very nice article. i was reminded of how the stock market works 🙂

  3. Another good explanation Fitz! To add more, the minimum number of shares that needs to be bought is is what they “board lot”. However, if it does not met it (i.e. an “odd number of shares”), you can still sell it provided that the stock broker can match your orders.

    Ultimately, the general market rule applies to stock market and that is BUY LOW and SELL HIGH.

    In addition, stock market investors especially young ones should look for “stock market burst” as an opportunity to buy price-beaten yet value stocks.

  4. Angel Cuala says:

    I was really waiting for this Part 2 before leaving a comment.

    Of all the statements you wrote above, it is about the education of students that I like the most. And I am glad you mentioned that.

    I truly believe people should learn how to make money as young as possible. Unofortunately in school, we are being motivated to be employees.

    Right now, I am doing my best to teach my children how money flows.

  5. Cai Abbass says:

    Lubbit! Thanks for sharing this, Fitz.

    I was first introduced to stock market when I was in grade school, my uncle would always read the morning paper and he would patiently explain to me the stock market table and how I might be able to gain mooor moonies in the future. But it really didnt get my attention, not until I have read Farnoosh Torabi’s You’re So Money last May.

    And now, I am looking for a mentor to get me onboarded. =) I am so ready to invest but the whole stock market thing is really big Im scared it might eat me alive LOL

  6. Dan says:

    Nice Article!…. im always interested to this kind of matter..and also interested to invest on this….the only thing is…i dont know how…and where…Fitz….new year is coming…would you help me out…as starters…

  7. Good to convert young folks to be early readers of your site early on! 🙂

  8. Liza says:

    I’m a new subscriber to your blog Fitz and I’m impressed. It’s just what I need to educate myself further on financial matters.

    On this topic: if I’m not mistaken, I think there’s a House Bill proposing to include a lesson on stock markets in the high school curriculum. I agree wholeheartedly. I hope our legislators act fast and approve the bill.

    I’ll be reading more of your blogs. Thanks for sharing your knowledge.

  9. Reira says:

    Nice article!

    Goggled about how to stop being lazy and found your website.

    I am lucky to come across this post. I finally understand what does stock market means and I am 24!

  10. […] Explaining the Stock Market to a 12-year Old Part 2 […]

  11. dinah says:

    hi fitz!
    nice to read ur blogs here. i’m too is interested how to invest money in a proper manner. i’ve had received a big amount of money b4 but i invested it in a wrong investment a so-called networking w/c is not so working. can i ask ur advice on how to join as stockholder?what basically required? thankz…

  12. ice says:

    Thanks fitz for this article. When I asked my teacher how stock market works, I remember her explaining but I could not grasp what she is saying. It is really not clear. But upon reading your article, I was amazed how simple stock market works and how you can earn money thru it.. i love reading ur blog… hope I will learn more about investments on MF, stock markets and real estate.

  13. johanna says:

    Wow this site is really helpful. Finally! I got a clear explanation on how stock market works. Im 23 and im plannng to invest my money, I just dont know how and where. I thought bout stock market, but know nothing bout it. Seriously speaking,i’ve been searching on the internet for a clear and easy to understand explanation about stock market,im so glad I landed here. Looking forward to learn more from you Sir!

  14. Yanti says:

    Thanks, love how you explain it in a very simple yet clear way. Just 1 question that passes through my mind, how do we know if a company giving cash dividen or not?

  15. Fitz says:

    Hi Yanti. Unfortunately, there’s no way you can know when a company will give dividends. They don’t have a regular schedule, and you just have to wait until they announce it.

  16. tessa says:

    Hi there. Very nice articles. Im not familiar with the flow of stock market until recently… I got curious… and interested that’s why I’ve been reading a lot about it…

    Your blog is a nice read. Easy on the eyes and not too technical. A lot of people moves away from technicality because it would take a lot of effort to understand from a not-so-technical person.

    I’m not sure… but your blog’s familiar. Maybe I was able to visit this a year ago (when i was still not into stocks). Good job. Keep it up. This is really a big help to us who wants to invest in the stock market. Thanks for the share.

  17. Olympia says:

    This is a very good article. I am a Seaman an officer but in 8 years working, i spend my money on my parent’s study for my relative car etc.. but i recently got this articles , i open my account and i started to invest slowly , maybe i will boost it every month. thanks alot.

  18. Tiffany Anne says:

    Wow, so that is how the stock market and investment works. I was 13 (January of last year), when I decided to surf the internet about ways to save more money for my future. I actually never believed that if you’ll be able to be on top for every school year and graduate as a cum laude in your college, you’ll have a better job than the others. I only believed that it will only give you more opportunities but not all opportunities are for better future right? Then I came across a blog, (not this though), I read an article about investing but I never fancied it. When I once met up with my mom in our town, she tagged me along with her at PNB. It’s not my first time to enter the said bank but I wandered around then grabbed something. There was an illustration of three glass jars with increasing coins labeled with three different months. It attracted me then I read it further, only to find out it suggests investments. I then put it back from where I grabbed it. I always considered investing as gambling because there are chances you can increase you money but you might also lose it all right? I then came across your blog a few days ago, I’ve been reading your articles, then I came across this. 🙂 The title encouraged me to. I always wondered about what other children and teenagers do and think about money related matters. That boy would be able to grow his money wisely, I’m telling you. 🙂 Not that much people of his and my age bracket would ask about those things. Most early teenagers would be curious and attentive to such conversations but not much of listening and processing until it bores them. People of my age bracket and younger should read more of articles like this and ask. 🙂
    This one’s the best article I consider at the mean time. 🙂 It changed my perspective about investments. 🙂 I’ve never thought you can sell your shares. I always thought that you only buy slots of shares of companies and it’s on your luck if the company never gets bankrupt. 🙂 Thank you for enlightening my perspective about investments. 🙂

  19. helen espiritu says:

    hi..i just want to know what happen to my son share of stocks from jollibee it was given to him year 2001 pa..its a 200 shares of stocks of jollibee

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