Posts tagged ‘wallstreet’

March 17, 2014

Learning Challenge #4: The Wolf of Moordrecht

On Sunday the second of March I traveled to the Southern part of The Netherlands, to Kaatsheuvel to  be precise. Now, in the South of The Netherlands, there is a lot of carnaval going on, but that was not the reason to travel to Kaatsheuvel. The oldest and one of the biggest Dutch amusement parks is situated in Kaatsheuvel. That was also not the reason I was in Kaatsheuvel, though I think this park might’ve got some awesome learning experience to offer as well… No, the reason I traveled to Kaatsheuvel, was another learning challenge.

I have never really enjoyed reading about the stock market and most movies about Wallstreet and stock exchanges bore me quite bad. When it comes to learning challenges that are out of my comfort zone, this one definitely cut it. Last Sunday I was learning about how to invest in stocks, how to “predict” share prices and the different types of stocks and shares you can invest in with a small budget. For the first time, someone joined me. A very close friend of mine wrote his thesis with the teacher of the day: Jeroen Klop.

Frans and Jeroen, ready for the challenge.

Frans and Jeroen, ready for the challenge.

Jeroen is a driven project manager that works at QnQ. He studies Technical Engineering and management in Rotterdam, the same study I did, and he is a carnaval enthusiast. Thus, the day started talking about the chemical process of crystallizing sugar in order to create crystal meth look-a-like substances to complete the Heisenberg (Breaking Bad) outfit Jeroen would be wearing that evening. Between all the carnaval parties, Jeroen found time to dig up his theoretical knowledge of his latest hobby: investing.

I must say that writing all my new knowledge down, is quite the challenge this time, since it was not only a lot, but it was quite complex as well. Let’s start with the beginning, in the simplest language I can put it in:

What is a share?
Everyone knows that companies make money by selling services or products. Mostly it is easy to determine what the main product of service of a company is. For QNQ, this is electrical engineering services, for the company I work for, Strukton Rail, it is rail infrastructures. Now, most companies that get bigger, at a certain point, start selling stocks or shares. Basically the companies sell pieces of paper or digital licenses, which represent a part of the company. By buying such a part, you become owner of a part of the company. When you buy a large part, you even get your say in annual meetings. In general companies sell these shares to obtain more money to develop the company or to invest in a project.

DSCN4678After a share is bought, the owner can resell the share (in most cases, but I won’t go deeper into the part where shares can’t be sold to others). In cases where a company gets positive publicity or becomes more popular, other people might want the share as well, and thus buy it from the reseller. When a share is very popular, the value will increase. However, at a certain point, the company might get bad publicity, or loose popularity. Then people who own the shares might want to get rid of the shares which will let the value of the shares decrease; a simple matter of supply and demand.

Now, some shares are sold individually, so you will actually buy a part of a certain company. Some shares are grouped into packages, like an AEX package. These packages help you to spread the risks. When you buy shares from one or two companies, your money depends on these two, thus a big risk. When you buy an AEX share, you buy from 25 companies at once and your risks are spread equally.

Popularity
Now, there are many factors that influence the popularity of a company on the share market. The difficult part is, that it is very common that the factors are not directly linked to how well a company is neither performing nor its value. People mostly buy on emotions. So, the publicity of a company is one of these factors. Positive publicity might increase the value, where negative publicity decreases the value. Then, there is the popularity of a target market. The last years, phones have been quite on the rise, where a few years back mortgages were pretty popular. Developments in technology have their effect on the market. Then there is national and international news. A crisis, financial aid to a country, war and disasters, they all have their effect on the popularity of companies on the stock market.

Besides the above, there is another very important factor. Some people have made it their business to advice on what stocks to buy. They predict what certain stocks might do in the future and based on these predictions they try to convince people to buy stocks, preferably via their company, and preferably via so called sprinters, or other constructions that have a shared interest for the buyer and the company.

Crystal ball
When it comes to influential factors, I could go on and on and on, but happily there are graphs to help you understand what a stock might do in the future. With the help of the website IEX.nl, Jeroen explained the most common graphs, that mostly represent the value or an interpretation of the value of shares of a certain company or package (like the Dow Jones or AEX stocks).

The first graph is the moving average. This average helps with getting rid of the peaks and dips in the graph, so the changes in value over an utterly short time are not influencing your judgment anymore. With really short term exchanges, you might want to zoom in on a more detailed level of the graph then when you are into it for the long term. At this moment, the average time a stock  is in someone’s possession, is 22 seconds. That’s how fast the stock trading works.

On the first graph you can see some yellow lines. These are trend lines based upon the last two peaks and last two dips in the graph. These lines help you to see if a trend is representing an increase or a decrease in value. In the example, the value is decreasing.

The second graph represents the RSI, or Relative Strength Indicator. In short: When the green line heads above the blue (horizontal) line, you are happy when you own a share. This is a good moment to sell. When the green line heads towards the lower part of the graph and is beneath the red horizontal line, it is a good moment to buy a share.

Now, last but not least, there is the MACD Graph, the Moving Average Convergence Divergence graph. This graph works even simpler then the RSI: When the green line is over the red line, mostly an increase of value follows. When the red line is taking the upperhand, it is time to sell your shares, since as soon as they have crossed, the value of your shares will decrease.

The trick to trying to predict the future, is to practice with these graphs, create a vision of your own and maybe even try it out for a while in a stock broker game (on IEX.nl there is a stock broker game available in Dutch, for free). Testing your investment strategy with real money can get pretty expensive.

Philips koers

How to deal
Now, to deal in shares, there are plenty of options, but mostly you will deal in shares via a company that has the right skills and formats to communicate with the market place, and is certified to do so. These companies are called brokers. Most banks offer these services and it is a matter of finding a bank that ‘feels right’ when it comes to picking a broker who will handle your orders. These companies charge you with handling costs, but besides these handling costs, you could easily start buying stocks up from a few cents. Another option, when you want to start an adventure on (one of) the stock market(s), is to become a broker yourself, or invest in companies that are not on the major markets yet, in exchange for a percentage of the ownership.

The stock market is, in short, the same as any other market. You can buy your eggs from a farmer in a closeby area, or in the local supermarket, but you can also go to the wholesaler and buy a bulk of eggs with a group of people and then devide the eggs, or make arrangements on regular deliveries of pre-paid eggs… and so on… Maybe the value of the eggs will go up the upcoming months and because you pre-paid for a certain amount, you saved yourself some money, but on the other hand, if the prices go down, you overpaid for your eggs.. The only questions that remains is, will your expectations and predictions be accurate? In the end, no one really knows up front.

So, what did I learn?
DSCN4669
I now understand the basic structure of the stock market and the way stock exchange works. I have an idea how to be able to say something about what a stock might do in the future when it comes to its value. I learned how to read the graphs and I learned that it is very well possible to start investing in shares up from a few cents plus the handling costs your broker charges you (per transaction). I got some information on the difference between long term and short term methods and we discussed ethics of the stock market and the different forms of dealing in stocks. And of course, we discussed a lot of details in the hours we spend talking about the stock market. I also got to pet a cute cat.

Did you enjoy reading this blog? Do you feel you have something to teach me? It is time to select the upcoming learning experiences and challenges! If you have a challenge for me, let me know! You can send me an e-mail or post a comment to this blog. I am sincerely looking forward to your e-mail!

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