What is a stock exchange?

A stock exchange is a company that make it possible for people who want to sell stocks and other investment instruments to be connected to a buyer. We can thus say that it facilitate the selling and buying process of stocks.

It is not possible for a buyer to meet a seller directly. Each investor must have a broker and when you want to sell or buy a stock the broker will place your order in the exchange computer. When you get a seller or a buyer the exchange will tell your broker and finally you will be informed by him. You cannot deal directly with the exchange yourself. Nor can you meet the person that is buying your stock.

Apart from facilitating the buy-sell process the stock exchange offer several advantages.

1. You do not have to go around looking for people to buy shares. Also even though some companies sell stocks over the counter this is a daunting task and this can be done using a stock exchange in minutes.

2. The stock exchange protect the investors in that you are certain to get a share when you buy and to get your money when you sell. You also have consumer protection institutions that can initiate actions if your rights have been infringed.

3. Companies that are listed on the exchange have to abide to some rules. They need to have a certain market capitalisation, they need to follow accounting standards, they need to issue financial reports every quarter among others, their shares have to be above a certain value, etc. As you can see, if you are investing in a company listed on an exchange you are sure that the company is secure.

4. Companies must get shareholders agreement before going ahead with some plans such as raising the number of shares, mergers and acquisitions, etc.

5. Companies listed on a stock exchange must a board of directors that are independent and capable of doing their jobs. At least in theory.


As you can see trading on the stock exchange offer some advantages. Even though when trading you have to pay some fees, i sincerely believe that the advantages far outweigh the disadvantages. In fact if you are buying for the long term the gain on the long term will be far greater than the fee.

So guys be safe and trade on an exchange.

Good investing.

What is market capitalisation?

There are two terms that define the value of the company.

1. The asset value
2, The market capitalisation

The asset value

The asset value is typically the total commercial value of all the buildings, equipment, furniture, patents , etc of the company. Typically everything that can be sold for a price. The reason that asset price is not used is that investors prefer to use market capitalisation as it is a better estimate of the company's ability to make a profit. A lot of asset is not an indication of the ability to make profit.

The market capitalisation

The market capitalisation can be calculated using a simple formula

Market capitalisation = share price X number of oustanding shares

Companies are classified in six broad categories depending on their market capitalisation.

Mega cap

A mega cap company is one that has a market capitalisation greater that $200 billion dollars. These companies are generally large and profitable such as Exxon. There are few of them. Generally their shares are quite expensive and difficult to obtain. If you have them in your portfolio keep hold of them.

Large cap

A large cap is a large company with a market capitalisation of $ 10 billion to $ 200 billion. Examples are Microsoft and IBM. These companies are relatively safe to invest but just as the mega cap their shares are relatively expensive and difficult to get. If you have them keep them unless a major catastrophe will befell the company.


Mega caps and large caps are also called blue chip companies. They are relatively secure to invest in. If you can get your hands on them in this bear market buy them and keep them. You will hold them for the long term.

Mid cap
A mid cap company has a market capitalisation of between $2 billion to $ 10 billion. However these companies offer greater return to the investor but a few of them will certainly fail. This make them a risky bet for the investor so it is better to limit your exposure to mid cap to not more that 20 %.

Small cap

A small cap company is relatively young and has a market capitalisation of between $ 300 million to $ 2 billion. Such a company offer great opportunity for growth. Imagine that if you invested in microsoft when it was a small cap you would be rich today. However a lot of small cap

Smaller companies are called micro caps and nano caps. They are very risky and if you want to invest in them you have to be very careful and limit your exposure to them to just a few percentage points of your wealth.

One last piece of information is that this information is not valid for every country. It is made for multinational companies. If you want to have your own classification for say Egypt, you will have to take the biggest company by market capitalisation and called it a mega cap and classify the other companies according to their market capitalisation.


Good luck. As usual i would like to give this advise again. As a new investor you should limit your exposure to small caps and mid caps. Only after having gained some experience and being able to analyse companies can you increase your exposure to them.

Happy investing.

Fees and commissions and how they affect your portfolio.

One of the things that you do not hear often is the impact of fees and commissions on your portfolio. Their is a good reason for this. The financial system has no advantage in whether your portfolio grow and shrink. That is because they derive their incomes from fees and commissions.


When you start investing you need to know that whenever you do a transaction you will need to pay a commission. When you buy or sell a share or any investment instrument you pay a commission. You might not realize it but if you start with a small sum you will soon find that you will have paid a large part of it to the brokerage firm as commissions.

To understand what it meant to your portfolio. Lets assume that you invest 1000 dollars with a fee of 10 dollars per transactions. You buy five types of shares. The fees is now 50 dollars. This is 5% of the investment. So if your portfolio has a rate of return of 5% per year then it meant that you will have to wait more that one year just to break even. So imagine that you start to buy and sell shares very soon your portfolio will start to shrink at a rate of 5 dollars per transaction. As you can see it is not a viable option for the new investment to trade often. That is the reason that I favour the buy and hold strategy, at least in the first few years.

So what to do?

When it come to fees the different instruments are not equal to each other. So here is an analysis of different instruments and how they differ when it come to fees.

1. Bonds, gilts and treasury bills.

These can be available at any central bank or their regional offices. They come with little fees.
However their return is not that mush.

2. Exchange traded funds, mutual funds and index funds.

These are my favorite when it come to reduce fees and commissions. It is ideal for the beginner investor. In fact it reduces the impact of diversification which is a great fee and commission eater. I think that a beginner should stick with these funds until they can understand the market and trade on their own in stocks.

3. Stocks

Stocks is the investment instruments that has the highest fees and commissions. In order to have a good portfolio an investor will have buy into many stocks and that will make the initial commision payable high. So i would advise any new investor to stick to bonds, cds, and funds.

4. CD, Certificate of Deposits

These come with small fees and some banks do not charge any. But Beware most banks do have a penalty when to come to taking your moner before the maturity date.

As you can see the fees and commisssions should be kept in mind if you a new investor. If you are not careful the only person that will benefit is the broker.

What is inflation and how does it affects your portfolio?

One of your most deadly enemy is certainly inflation. While the aim of your portfolio is to grow with time your first aim is to make sure that your portfolio is able to keep up with inflation.

So what is inflation and why is it so deadly?

Inflation can be defined as the increase in the price of goods, services, wages and natural resources. Simply speaking the price of everything that a person may want to buy increases with time as a result his salary will also tend to increase just to be able to buy the same amount of goods.

What are the effects of inflation on investors?

1. It decreases the real value or purchasing power of actual money. If the price of goods increases with time, then a sum of money will buy less and less volume of goods with time. As a result you will have to work hard to increase the value of your investments just to keep the volume of goods that you can buy constant. One of the first aim of any investors in is thus to be able to beat inflation. If you are unable to beat inflation then the real value of your portfolio , measured in the volume of goods that you can buy , will decrease with time.

2. It cause severe disruption to stock markets for investors will tend to buy stocks that give a return greater than the rate of inflation. Any stocks that is unable to beat inflation will be sold even though the company may be of sound health but is just suffering from a temporary setback. It just amplifies the sell off of stocks that is giving low return irrespective of sound fundamentals.

3. Bond that has medium and long term maturity and that has not been indexed to inflation will slowly lose value if inflation is greater than the interest rate on these bonds. People who have invested largely in bonds will thus sees their portfolio decrease in value with time.


4. Some stocks do badly in an inflationary environment. This is because increase in the price of raw materials is more difficult to pass to consumers in a competitive market. As a result this will drive the profit margin down. This will have a two fold effect on these companies. (a) it will make it difficult to give wage increases and (b) if wage increases are given then the dividends given to shareholders will drop causing a drop in the share prices of these companies.

As you can see the effects on investors and companies alike can be quite devastating. Even moderate inflation if compounded over a long time can be quite dangerous.

So what can be done to reduce the effects of inflation?

The best way to fight inflation is to be well invested with the long term in mind.
Although inflation decimate all investment categories over the medium term, the return over the long term tend to be greater than the cumulative effect of inflation. Also inflation do not affect all asset categories to the same extent.

A well diversified portfolio with the following asset class will make your portfolio inflation resistant.

1. Treasury bills and bonds
Although treasury bills and bonds suffer poorly in inflationary periods, they are able to maintain the value of the portfolio in time of stock market crash and deflation. Also even bills and bonds over the medium and long term have returns that exceed inflation.

2. Stocks
Stocks suffers less that treasury bills and bonds they have the highest possible return when considered over the long term. As a result a well diversified stock portfolio with stocks from different industries and different countries will resist well again inflation. Since inflation does not affect every country and industry the same way and at the same time.

3. Gold

Gold is a good inflation hedge. In inflationary times the value of gold rises to keep up with inflation. So it is a good advise to have a certain percentage of your wealth in gold. Beware however that gold only keep its value and offer no return.Hence your investment in gold will not increase in real value but merely keep up its value.

4. Commodities

It is known that the value of commodities increases in time of inflation, although some commodities will not behave this way. So if you are of the adventuring type, you can invest in commodities futures. I would however not advise any one to do so.

5. Real estates

It is well known that land is a good investment and that it behaves like gold and will keep up the value of the portfolio especially in trouble times. I would thus give the same advice as with gold as land offers no return.

Ok guys that is all. As you can see a well diversified portfolio is a good inflation strategy as over the long term its return will be greater that inflation.

Happy investing.

What is compounding?

Compounding is one of the most important concept that the new investor must understand. It is fundamental because it is the behind one of the investing strategies that is most used: The buy and hold strategy.

To start lets talk about the maths. If you start with a certain amount P the principal and you invest this money at an interest rate I for a certain amount T then the amount that you will get is given by the formula

amount = P x (1+ i/100)^T

For more details see my post on interest rate here.

For the purpose of this post i have compiled the table below that shows the return of three persons investing in different conditions. All three are buy and hold investors and as you can see the returns are different.

Name	Start	End	Initial amount	Interest rate	Amount at 65
Anne	20	65	10000	10	728900
Jack	30	65	10000	10	281000
Paul	20	65	10000	9	483200

We can thus deduce that three conditions must be present for you to maximise your investments.

1. Time

The person must invest as early as possible. As you can see from the table Jack and Anne started investing at different age. The 10000 dollars of Anne were invested for 45 years while that of Jack were invested for only 35 years. This difference of 10 years results in the investment of Anne to be almost double that of Jack.

One advantage for Anne, as you can see from the graph above, is that after some time the increase in value will accelerate and at this point you can stop investing or at least you can reduce your monthly contribution. While Jack and Paul have to increase their contribution just to reach the level of Anne.

2. The rate of return

As you can see from the table if two persons invest with a difference of just 1 % in the interest rate then you can have a large difference in the amount of money at 65 years. Both Anne and Paul started investing at 20 years of age but one at 1o % and the other at 9 %. This will show to you the difference of just 1 % difference in the interest rate. That is what will happen if someone invest in a mutual fund that take 1% return or if you buy and sell often and the broker take 1 % commission. With time as you can see you return will be greatly reduced.

3. Reinvest interest and dividend

It may not be obvious from the graph but the compounding work only if the earnings are reinvested every year. So guys do not use those interest and dividends.

I hope that this post will have shown to you the advantages of buy and hold and the merits of compounding.

How and when is a dividend paid?

ave you ever wonder when and how dividends are paid but found the process too complex to understand. I have been there so here is a detailed but simple explanation about how these things are done.

So you have bought some stocks and as a result you now have the right to receive dividends from the companies. A dividend is just a share of the profit that the company will give you. Not all companies pay a dividend but it is better for an investor to invest in a company that pays dividend. Hence the paying of a dividend will be an indication of the company good health and by monitoring the dividend payments you will have an idea about the health of the company.

Dividends can paid either cash or . The company will pay a certain amount of money for every share that an investor is holding on the due date or the company might issue to each investor an additional number of shares. A dividend is usually paid in term of shares only if the company has a temporary problem of cash flow. You should be careful as dividend payment in term of shares is not necessarily a sign of a bad company. A good company that has strong fundamentals may have problems of cash flow in a recession and as a result will not be able to pay cash dividends.

So how and when are dividends paid?

It is the board of directors that take the decision to pay a dividend. There are four important dates and they are as follows :

(i) The declaration date - It is the date on which the company declares that it will pay a dividend

(ii) The ex- dividend date - A stock that is bought on this date and after will not receive the dividend. If you want to sell a stock you can sell on this date and still receive the dividend.

(iii) The date of record - This is the date where the company will check the record and will send the dividend to every person and company on the list. This date is usually one day before the ex-dividend date.

(iv) The date of payment - This date is usually after the date of record. It is the date at which the check is issued to you. You need not worry that it is some time after the date of record. You will definitely receive your check but it might take some time.

I hope that you have understood that well. By the way if you have some questions for me place a comment and tick the receive comment by email and you will receive the answer in a short time.

Good luck guys

5 tips to survive a bear market

In a market like this, there seems to be little hope. The share market is falling daily and people are seeing their wealth portfolio shrinking.

So what should you do? Perhaps selling every stocks and put your money in stocks. That would be a great mistake. For as you already know the return of the stock market outperform the return of any investment instruments. In fact the best advice that i can give you is to sit tight and ride the recession. I know it is a little bit difficult so i have compiled 5 advices that you can follow to make sure you do not go nuts before the recession ends.

1. Do not borrow money to invest

The stock market will surely go up one day. However if you borrow money to invest, chances are that in the mean time you will have to pay the loan. Or if you will pay it at a later time, then pay back time may come and the fantastic return that come with the rise of the stock market may not have started. So you will be forced to liquidate assets on the cheap. As a matter of principle I do not advise my readers to borrow to invest.Even when you will become more knowledgeable in the market.

2. Invest only money that you do not need

As a second principle i do not advise people to invest money that they will need in the next few years. While the stock market will surely rise in the long run it may actually fall in the short term and as a result when you will need the money you will have to sell a lot of depressed assets. It is like shooting yourself in the foot.

3. Stick to your plan

If you have a plan that states how much money you should invest monthly, or what is your allocation then stick to it. On the contrary now is the time to invest more than your plan states not less. Buy assets on the cheap and do not under any circumstances change your allocation or get out of stocks.

4, Do not watch the news

Do not watch the news. Remember these people like it when there is blood on the street. So if you have a nice plan and you are sticking to it then do not react to the news. Remember a lot of these tv people do not have a clue about what they are saying.

5. Rebalance your portfolio

Some shares in your portfolio will lose value more that others. Use extra money that you have to rebalance the portfolio every now and then as stated in your plan. Do not panic and sell stocks that are falling in value but which are sound businesses and who are just being affected by the selling panic.

So guys sit tight and hopefully after this bear market ends you will come out of it a little bit richer.

Good luck.