What Are Stocks: How to Buy Them, Types of Stocks, and the Risks of Stock Investment

 What are Shares?

Shares are evidence of capital participation or investor ownership in a company. By owning shares, investors have the right to share in the company's income, assets, and even vote in the General Meeting of Shareholders (GMS). Of course, the percentage of shares owned determines the extent of their rights.

How Does the Stock Market Work?

Companies that issue shares offered on the stock exchange are called issuers. To be traded on the stock exchange, which in Indonesia is the Indonesia Stock Exchange (IDX), issuers must first go public. The process of selling shares for the first time on the exchange is called an Initial Public Offering (IPO). After the IPO, shares are traded on the secondary market.

What Are Stocks: How to Buy Them, Types of Stocks, and the Risks of Stock Investment

Share prices can fluctuate according to the laws of supply and demand. The more transactions occur, and the easier it is to find investors selling or offering shares, the more liquid the shares are. Supply and demand for a share can be influenced by many factors, including the company's business performance and prospects, economic and political conditions, sentiment, and much more.

Types of Shares

More and more people are starting to invest in shares to achieve their financial goals. There are several reasons why stocks are a popular choice for many people, one of which is the ease of investing anywhere and anytime. The Indonesian capital market also recognizes two main types: conventional capital markets and sharia capital markets. Sharia stocks are a type of stock that complies with sharia principles in the capital market. Therefore, before you start investing in stocks, it's important to understand the various types of stocks available.

Benefits of Stock Investment

The benefits of stock investment include the following:

Receiving dividends: Dividends are a portion of a company's profits distributed to shareholders. The amount of dividends to be distributed is proposed by the company's Board of Directors and approved at the General Meeting of Shareholders (GMS).

Capital Gain: Capital Gain is the profit when an investor sells shares at a higher price than the purchase price.

Stock Investment Risks

Investing in stocks is certainly not without risks, including the following:

Not Receiving Dividends: Companies generally distribute dividends when they demonstrate good performance. However, when a company experiences declining performance or losses, the company cannot distribute dividends.

Capital Loss: Capital Loss is the opposite of Capital Gain. This occurs if we sell our shares for less than the purchase price.

Liquidation Risk: If an issuer goes bankrupt or is liquidated, shareholders' rights are the last in line to be paid, and will be granted after all the issuer's obligations have been paid. Shareholders may receive nothing.

Delisted Shares: For various reasons, shares can be removed from the stock exchange (delisted), ultimately making them no longer tradable on the exchange.

Before purchasing shares directly, it is important for investors to understand their investment risk profile. Stocks are an investment instrument with the potential for high returns, but they also carry high risks. High risk, high return. Stocks are an investment instrument suitable for those with an aggressive risk profile. Furthermore, expertise, data, and time are required to analyze stocks before purchasing them.

How to Buy Stocks

Investors wishing to purchase shares on the stock exchange, specifically the Indonesia Stock Exchange, must open an account with a securities company or securities firm that is a member of the exchange. When opening an account, investors will be asked to provide documents such as identification, a Know Your Customer (Know Your Customer) form, an initial deposit, and other documents. Investors must also open an investor fund account at a designated bank for transaction purposes. Stock purchases and sales are typically settled within two trading days. For example, if an investor buys today, they must deposit the funds within two trading days and receive the shares within the same timeframe.

Stock trading is organized by the Indonesia Stock Exchange (IDX), and currently, shares are traded in a scriptless form, rather than in physical form. Central settlement of stock transactions is carried out at the Indonesian Securities Clearing and Guarantee Corporation (KPEI), which carries out clearing and guarantees the settlement of transactions in the capital market. Investors' shares are stored and recorded by the Indonesian Central Securities Depository (KSEI). The IDX, KPEI, and KSEI are self-regulatory organizations (SROs) under the supervision of the Financial Services Authority (OJK).

Buying and selling shares can be done through sales staff working at securities companies. However, with technological advancements, many securities companies now provide online trading services, allowing investors to transact directly through these platforms.

How to Monitor Share Ownership

Investors receive transaction reports every time they make a share transaction and monthly reports on their share ownership from securities companies. However, investors can now independently monitor their securities and/or fund holdings online through the AKSes facility launched by KSEI.

Types of Investors in the Stock Market

In the stock market, there are several different types of investors, depending on their investment objectives, approach, and risk tolerance. Here are some common investor types:

Long-Term Investors: This type of investor aims to hold their investments, such as stocks, for the long term, usually years or even decades. They tend to focus on company fundamentals and conduct in-depth analysis before making investment decisions.

Short-Term Investors: This type of investor tends to engage in more active trading and often capitalizes on price movements in investment instruments, such as short-term stocks, to generate quick profits. They use technical analysis and various trading strategies to make investment decisions.

Value Investors: This type of investor looks for stocks that are considered undervalued, or priced below their intrinsic value, also known as their true value. They hope that the stock price will increase over time as the market recognizes the company's true value.

Differences Between Stocks and Mutual Funds

There's another way to invest in stocks if you have limited time, funds, or expertise: equity mutual funds. Mutual funds give you indirect access to the stock market.

Although both stocks and mutual funds are investment instruments in the capital market, they have differences. A mutual fund is a type of mutual fund where investor funds are invested by an Investment Manager in stocks listed on the Indonesia Stock Exchange. Mutual funds tend to have higher returns than other types of mutual funds, but also carry higher risks. On the other hand, shares are valuable documents that represent ownership in a company. When you buy shares, you become an owner of that company.

Here are four differences between shares and mutual funds:

Fund Management:

Stocks: Investors or traders manage their capital independently.

Mutual Funds: Funds are invested by an Investment Manager.

Risk Level:

Stocks: Risk of stock value decline and issuer liquidation.

Equity Mutual Funds: Risk of a decline in the Net Asset Value (NAV) of the ownership units.

Potential Profits:

Equity: Profits from capital gains (the difference between the selling price and the purchase price of the shares) and dividends.

Equity Mutual Funds: Profits from increases in the value of the ownership units.

Fund Disbursement Process:

Equity: Funds from the sale of shares are transferred to the Investor Fund Account (RDI) on T+2 (two trading days after the transaction date).

Equity Mutual Funds: The fund disbursement process takes longer because it involves an Investment Manager.

It is important to identify and understand which mutual funds align with your goals and risk profile.