Why do people buy stocks?

Everyday millions of stock/shares are traded in the PSE (Philippines Stock Exchange) but a question would arise, why do they do that?

An individual can participate in the stock market in three ways by, investing (investor)speculating (speculator), and trading(trader).

Let’s start with trading, an individual trading is called a trader, a trader attempts to take advantage of a small price increase that would occur in a day. A trader treats stocks as a mere paper that transfers from one hand to another. A trader holds shares for a short time like a week, days, or even less than a day.

speculator is an individual taking great risks for a potentially great reward. The difference between a speculator and an investor has been a thin line. Mr. Benjamin Graham, the dean of security analysis and author of the famous books like Security Analysis and The Intelligent Investor, defines a speculator in his book the Security Analysis, to paraphrase, as an individual having an investment operation not meeting the requirements of thorough analysis to promise safety of principal and adequate return. A good example would be to buy a company with no history of gain (speculating for a turnaround).

The third and last alternative is investing, the investor is an individual who had done thorough analysis in the company he/she is investing in and treating ownership of shares as being part owner of a company. An investor’s time frame is usually a few years or more.

The three types of individual above determine the prices of the market every day. They may bid (price they are willing to buy) high on shares that they are optimistic about or sell shares they think is unfavorable.

I do not claim or say that one of the three types of participant in the market is the best as each has their own advantages and disadvantages. No matter how they participate in the market, their purpose is to profit from the increase in the market value of their shares, from the dividend declared (cash distribution to share holders) or both.


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