Contents of this article
What Is a Stock?
According to Wikipedia, a stock (equity, stock or share) is a certificate of the money an investor has contributed to the issuing company. A stock is a certificate issued by a joint-stock company, or a book entry, confirming ownership of one or more of that company’s shares. The holder becomes a shareholder and thus an owner of the issuing company.
For example, if a company has issued a total of 1 million shares and an investor holds 100,000 of them, that investor owns 10% of the shares the company has issued. We then say the investor is a shareholder owning 10% of the company.
Stocks and the Issuing Company
Stocks are issued to shareholders only by joint-stock companies. When a company is first founded, the founding shareholders contribute capital and receive shares in return, representing their ownership of the company. Later, when the company needs to raise capital to expand, it issues more shares and sells them to other investors, using the money to expand its production and business. We have a detailed article on how a company grows and raises capital from its founding to its IPO (initial public offering) here.
Shareholders can also transfer their ownership by buying and selling shares with other investors – and this is what creates the stock market. Most stocks are bought and sold on centralized stock exchanges, or traded directly between investors on the OTC market. When stocks trade freely in the market, their price movements are determined entirely by supply and demand and by investors’ expectations.
Market Price and Par Value of a Stock
A stock’s par value represents the share of charter capital the shareholder has contributed to the company. Charter capital is the total value of assets the owners have contributed or committed to contribute when founding the joint-stock company. In Vietnam, the par value of each share is set at VND 10,000. This means that if you hold 1 share, you have contributed VND 10,000 of charter capital to the company. So from a company’s charter capital, we can work out how many shares it has issued. A shareholder’s ownership percentage is equal to their share of the charter capital.
When a company is newly founded, each share is worth exactly its par value. As the company grows, its value rises or falls with its actual business results, which in turn affects the market value of its shares. The price at which a stock trades in the market is called its market price, and it is determined by supply and demand and by investors’ expectations of the company’s potential and performance. For example, a share of company A is worth its par value of VND 10,000 at founding; after 5 years of strong business performance, the share has risen to a market price of VND 40,000, quadrupling the value of the shareholders’ stakes.
How Do You Make Money from Stocks?
Stock investing is one of the most effective ways to build personal wealth. Stock investors’ returns come from two main sources: capital gains and dividends. Dividends are the part of the company’s profit distributed to shareholders, usually paid in cash or shares (sometimes in kind). Capital gains, put simply, come from buying a stock in the expectation that its market price will rise. When a company grows and does well, its value increases and its share price rises.
Stocks are a key part of many individual investors’ portfolios. Stock trading is subject to government regulations designed to protect investors from fraud. Historically, stocks have outperformed most other investment channels over the long term; we also have detailed statistics on this that you can read here.
How Much Money Do You Need to Invest in Stocks?
First, the minimum requirement. On Vietnam’s stock market, stocks trade centrally in 2 forms: board lots (100 shares) and odd lots (1–99 shares). To trade board lots, you must buy or sell in multiples of 100 shares, which is also the most liquid way to trade. If you want to trade smaller amounts, you can also buy or sell 1 to 99 shares through odd-lot trading.
Today, share prices on the exchanges usually range from VND 10,000 to VND 500,000 per share, so the minimum capital you need to start investing in stocks can range from VND 10,000 to VND 500,000, a relatively small amount for most investors.
Of course, the more capital you invest, the higher your potential profit, but the higher your risk of loss too. So how much each person invests in stocks depends on their financial resources and risk appetite. Before you deposit money into your brokerage account, remember that you could lose all of it. Could you sleep well if you wiped out your account and lost everything you invested? That is your risk appetite.
For example, an investor has savings of VND 1 billion but cannot accept a loss of more than VND 200 million. The best advice for them is to invest only VND 200 million in stocks, since that is their maximum risk limit. They can put the remaining VND 800 million into safer channels such as bank deposits or bonds.
Read our series on personal finance and building a personal investment portfolio here.
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