Photo by Simon Stratford

Hi kids,

Are you interested to learn about stock market?

Before we start the lesson, you have to know that stock market is also known as share market, a market where people openly and actively buying and selling shares i.e. ownership of companies.

You might want to ask me, “Why people buying shares?” When there is something good, everyone wants to be a part of it, isn’t it? Similarly, when there is a profitable, growing business, everyone wants to own a part of it – to earn part of its gains. The distribution of the gain is called as dividend.

Then you might want to ask me, “Why people selling shares?” Everything has their price. The same goes with the ownership of a company. The price for a unit of share in a company is determined by the market’s demand. When there are more buyers than sellers, the share price tends to increase. On the other hand, the share price tends to lower when there are more sellers than buyers. The share holders sell their shares when they can make gain between their buying and selling prices; or when they afraid that the share price will drop or drop further below their buying price; or when they are no longer interested to own shares in that company.

Let’s start our lesson.

Lesson #1: Share

Tom and Jerry want to earn money during school break. They want to start a lemonade drink business. It would cost them ten dollar to setup. Tom has four dollar saving. Jerry has three dollar saving and his mother gave him additional three dollar. They gather the money and buy all materials needed to make lemonade drink, and soon they are in business.

Tom’s share is four over ten, or forty percent of it. Jerry’s share is six over ten, or sixty percent of it. Jerry is the major shareholder.

Lesson #2: Profit Distribution

Their have twenty dollar after one week in business. They are now thinking of distributing some of the profit. Tom wants to buy a story book. Jerry wants to buy a pencil box. After so much thought, they mutually agreed to distribute ten dollar among themselves (this is called as dividend) and leave the remaining ten dollar to keep the business running.

Lesson #3: Private Investment

Week three. Tom’s elder sister, Mary, sees their lemonade business a profitable and growing business. Mary offers ten dollar investment to them. Tom and Jerry are thinking of expanding their business. They could use Mary’s investment to open another branch at another strategic place. They could hire Mary’s friends, Tina, to assist Mary at the new branch.

How much shares to give to Mary? Tom had invested four dollar and currently owns forty percent of the business. Jerry had invested six dollar and currently owns sixty percent of the business. Tom and Jerry judge their business now worth forty dollar. Therefore Tom’s share in it is sixteen and Jerry’s share in it is twenty four. Mary’s ten dollar investment would give her ten over fifty shares, or twenty percent. With this development Tom’s new share is sixteen over fifty shares, or thirty two percent and Jerry’s new share is twenty four over fifty shares, or forty eight percent. Jerry is still the major shareholder.

Lesson #4: Selling Shares

Their lemonade business is booming. The second branch is as successful as their first branch. Mary’s friend, Tina, wants to jump aboard into their business but Tom and Jerry insist that they don’t need additional investment at the moment. Thus Mary proposes to Tina to buy fifty percent of her shares. By now, at the fourth week, Tom, Jerry and Mary judge their business worth a hundred and twenty dollar. Therefore, her share in that business is now worth twenty four dollar. So, fifty percent of it is twelve dollar – the amount that Tina has to pay to earn ten percent in that business. Tina agrees and pays Mary twelve dollar for Mary’s shares. So now, each Tina and Mary owns twelve over a hundred and twenty, or ten percent, and Tom’s and Jerry’s shares remain the same. Good for Mary – she had get back all her ten dollar initial investment plus two dollar profit (plus dividend), and yet she still could earn dividend from the business.

In the nut shell

The above is an overly simple explanation of stock market trading. Anyway, I hope that it had triggered your interest to learn further about stock market investment. You know, it is better to start to learn about it early. The earlier you start, the more you’ll learn and the better investor you would be.