Juan:'Any more advice on what stock/shares I should or shouldn't buy?'
Peter:'From my experience, I would say you shouldn't try to buy shares or stock in companies when they first go public, when they first start to sell their shares on the stock market. This is called an IPO which stands for Initial Public Offering. Normally, the price of the shares in these companies will decrease a few days after they have started being traded (bought and sold) on the stock market.'
Juan:'What can I do if the price of the shares I have in a company falls a lot in a single day. Should I sell them even if it's a lot below the exit point I previously decided that I would sell them at?'
Peter:'You can't do a lot apart from selling them or keeping them. Often, if the share price of a company falls a lot during one day, the company will ask the stock exchange to suspend trading its shares. This means that no one can buy or sell the company's shares, so the price of the shares won't change or fall further.'
Juan:'There seems to be a lot of risk in buying stocks and shares. Maybe, I should buy financial securities instead?'
Peter:'You do know that stocks and shares are a type of financial securities?'
Juan:'To be honest, I don't know what financial securities mean.'
Peter:'Financial securities are normally just called securities. Bank notes, stocks and shares, bonds etc... are all different types of securities. Securities are financial contracts which can be bought and sold by different people. So, with a share, it is a financial contract where the company says you are a part owner of the company. You can buy the share and then sell it to anybody you like.'
Juan:'I've read something about stock split, where a company reduced the value and price of their shares. Does that mean that the people who own shares in that company will lose money?'
Peter:'No, it doesn't mean that. When companies think that their stock or share price is too expensive for people/investors to buy (for example, $120 a share), they may decide to reduce the price of the shares by 50%, so they are easier for people to buy. But the shareholders who own that company's shares will be given double the amount of shares that they had before, so they don't lose any money.'
Juan:'So the company increases the number of shares it has, but the value of the total number of shares doesn't change. But isn't that the same thing as a rights issue?'
Peter:'It's similar, but the purpose is different. A rights issue is when a company decides to create completely new shares in the company and then offers them to its existing shareholders to buy at a reduced/discounted price. The company does this to directly make/raise money to invest in the company. The result will be that the average share price will fall, but anybody who bought the shares will have made a profit because they bought them at a reduced price.'
Juan:'So what is a secondary offering?'
Peter:'A secondary offering is when some shareholders (normally part-owners of the company before it went public) who own a large stake in the company (e.g. their stake in a company is 10% of the company's shares), decide to sell a large amount of their existing shares (not newly created ones) to the public on the stock market. When a company goes public, normally the majority of shares are kept by these original part owners. And only a part of the ownership of the company is sold to public investors on the stock market (for example, 30% of the ownership of the company). This percentage/amount of shares of a company which are traded (bought and sold) on the stock market is called the public float, shares that anybody can buy. The rest of the shares are normally still kept by the original owners and the company's employees or by very large investors who have some control over the company. So with a secondary offering, the percentage of the company's shares which are part of the public float increases (for example, from 30% to 45%).'
Juan:'I thought that the name for all the shares of a company that could be bought by the public on the stock market was outstanding shares? But you said they were called the public float.'
Peter:'Outstanding shares, is different. As I said before, the public float is the shares owned by the public and that are traded on the stock market. But there are other shares which are owned by employees of the company and owners of the company before it went public. These shares have restrictions on when or how they can be sold to other people and are called restrictive shares. So, the outstanding shares is a combination of both all the shares in the public float and all the shares which are restrictive.'
Juan:'One of my friends from university works in a multinational military manufacturer and he told me they have just won a $2 billion contract, but nobody outside the company knows about it. Should I buy shares in the company?'
Peter:'If nobody outside the company knows about this contract, then it is illegal to use this information to buy shares, because you know that the price of the shares will increase. This is called insider trading and if the authorities or police find out, you can go to prison.'