Stocks, Kylie Jenner and Snapchat
Investing in stocks is one of the topics that has always been, is and will be interesting. Why? Because stocks are one of the most attractive investments. But how do stocks work? What is Kylie’s role in this world? And how do you find the "right" share?
What are stocks?
Even though stocks are a bit of an abstract concept for many people, they've existed for almost 400 years. The German word “Aktie” derives from the Latin word "actio", which can be translated as "claim to action". At that time, as well as today, this means a "claim" or "title".
When the first major companies and economic alliances emerged 400 years ago, several business people typically put together money to finance their business activities. To keep track of who contributed how much, each received a "title" in the form of shares on the company or economic alliance according to the value of his deposit. Thus, the number of shares per company or alliance was limited to a certain number. The value of all these stocks was the share capital. The more shares a businessman owned, the greater his "claim" to the company. Note that the words stock and share can be used interchangeably.
How much does a share cost and what does it enable me to do?
Today, you no longer have to be one of the founders of a company to receive a "title" for it. Most companies allow you to purchase a portion of the company at a later date. This is achieved by buying a share.
How can Kylie Jenner’s ACTIONS impact a share price?
The share price is determined by the supply and demand principle. If many people want to purchase a stock, it is more expensive; if owners of a stock want to give up their title, the price drops.
These days prices can be influenced by varying events. If, for example, a music star on social media negatively comments on a company, the price of this share may fall by several percent.
This is how Kylie Jenner’s announcement that she would no longer use Snapchat following its update contributed to a significant reduction of the parent company’s share price in February 2018 (Snap).
The price dropped at times by almost eight percent, which in comparison to the share capital is the equivalent of about 1.7 billion US dollars.
If you purchase shares, you will not become the founder, but a co-owner of the company. As a co-owner of a company you are entitled to participate in the business activities. This can take various forms; such as influencing its strategy or having a say when it comes to management’s compensation. In addition, you can benefit from the company's profits (via the dividend distribution). At the same time, you carry portions of the company’s risk with if it does not perform as predicted.
But since you usually only purchase a very small percentage of all shares of a company, your "right" (to impact the business) is also very limited. Typically, one share - one vote applies when it comes to the "right" of co-determination. In practice, that means you can not exert your right to influence to a high degree.
Considerations when buying stock
That's why it's important to consider very carefully which company’s shares you want to acquire in order to get a "right" to co-determination. You should consider the following:
Given that I personally cannot influence the company, can I trust that other people will steer the company the way I see fit?
Will the products and services of the company still be in (high) demand in the future?
Will the company’s management lead the company into a successful future? For example, is the company part of the digital sector? Does the company leverage digital distribution channels?
Do I understand the company’s business model of the company? How does the company make money? Which costs do the company incur?
Which competitive advantages does the company have? Are these sustainable? Does the company strengthen its competitive advantages?
You should know the key metrics to better choose stocks. We’ll review these in the next article.
Written by Clara Creitz
Finelles Founder. Coach and Consultant (UBS, Towers Watson).