Stock Marketing For Beginners | How The Stock Market Work
Investing in the stock market can seem like a crazy prospect for a generation of young adults that have two cents in their pocket, and $100,000 student loan for a degree that they don't use, but when it's done right you can take that 2 cents turn it into 3 cents. That's more than you had yesterday and isn't that the goal.
What Is a Stock?
A stock otherwise known as a share is a financial token or instrument that signifies ownership of a company in some proportion, basically if Amazon had 1,000 shares and you bought one share you would own 1/1000th of Amazon, in reality Amazon and companies alike have millions of shares but that sums up the point.
When you own a stock that means that you own a portion of that company, and as the value of that company increases so does your stock price, there are also common and preferred stocks which refer to the voting rights of a shareholder common shares have voting rights and preferred shares don't, when you have voting rights you can vote on things like board elections mergers and other financial decisions, preferred shares however are called that because they get preference when a company pays a dividend, which is basically a split of the profit of a company with the shareholder and they also get preference in other financial situations. Stocks can get much more complicated than that! but these simple understandings will serve enough to the basic investor.
Why Do Companies Sell Stocks?
The next thing you might be wondering is why exactly companies will sell stocks?! and that answer is simple to give money. Stocks allow a company to raise massive amounts of operating capital with essentially no extra effort or product. The modern stock market often bases the value of the company its potential earnings down the line, this means that relatively small companies can earn millions or even billions if investors think that they can succeed in the future, so then if a company wants to sell their shares they need a place to do it enter the stock market.
How Companies List Shares?
Companies list shares by selling them through an initial public offering or IPO on an exchange, this essentially changes the status of a company from a privately held business to a publicly traded one. IPOs can let company founders cash out their stake or just let the company raise money, once a company's stocks are listed on an exchange the public can trade them, usually prices will fluctuate based on public opinion but the more concrete trends and fluctuations are usually dependent upon a company's earnings and operations, these can be measured by P/E ratios or price to earnings ratios as well as a variety of other metrics, this is usually where casual investors get scared and their eyes start to glaze over but fear not, it's not as complicated as it sounds.
Why And How Shares Fluctuate?
We need to understand how and why a share price fluctuates!. The stock market is composed of millions of investors and individual traders who all feel different ways about a company, they all make independent choices and the net of those choices result in the positive or negative movement of a stock, if more people buy then the price has to climb, if everyone wants out of a company then the price falls due to lack in purchasing demand. For example say you post something on Craigslist for $100 after posting you get 100 emails saying they'll come to purchase your item all cash right now, most people at this point might start thinking that they price their item too low! and thus raise the price until in theory it reaches the most that the one single last buyer will pay for it. Conversely, if you receive no offers you'll likely keep dropping the price until someone buy it. This is similar to how the stock market moves except that the price rise and drop aren't done consciously rather by millions of transactions every second, this is the supply and demand.
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Supply And Demand:
For every stock purchase or sale there has to be a buyer and a seller, if there are more buyers then the price will go up, if there are more sellers the price will go down. Traders often might talk about the bid-ask spread, which basically means the difference between the bid or what someone is willing to pay to buy a share and the ask or what someone is willing to sell a share for, supply and demand is fairly simple to understand at the end of the day if more people want something that thing (in this case a stock) will be more expensive.
Matching Buyers to Sellers:
Why Invest?
You might be wondering... I don't have time to understand this! and why should I even invest anyway when I can earn 2 to 3 percent just keeping it in a bank on the high side!? The answer is pretty simple if you do it right you can make a lot of money. Using a common example that you might have heard, if you bought one thousand dollars of Amazon stock back in 1997 you'd have roughly 1.5 million dollars today! That's a long investment timeline, but I think most people would agree that the purchase would be worth it. Other companies often provide return rates like 30 to 70 percent each year, which is still going to build you a lot of wealth compared to that 2 to 3 percent each year kept in a bank account. In essence as long as you're able to make more than 3% in the stock market you're doing better with your money than just keeping it in the bank.
How to Invest?
Now that we understand the stock market to be a real-time marketplace where you can purchase a part of companies you think will succeed, the next step is to figure out HOW? The first thing you'll need is a trading account, you can start one with common providers like Etoro or other major banking institutions, but you can also use free trading services like RobinHood, common trading services will charge fees for every trade you make, but new tech companies like RobinHood have made everything completely free! that means you can invest all of your money in a company and not worry about paying fees to the brokerage.
Once you have an account in any trading service you have to decide what companies or multiple companies stock to purchase, which is arguably the hard part! you also have to have a certain amount of money. Stocks range from a few cents to many thousands of dollars, the key thing about stocks is that you can purchase part of one, for example at the time of writing, a single share of Amazon costs north of $3,300. Thankfully, we can use what is called fractional shares to invest in Amazon with much less than that. Before you make a purchase you want to do extensive research to make sure you understand what a company does to make money whether they're in good financial standings, and also see what experts think about a company and whether you should buy it, at the end of the day you do have to assume some risk, so it's important you only invest money you're capable of surviving without at least for a little while or until a certain stock comes back up if it does fall on harsh times.
What we Didn't Cover!
In this article we've covered the basics of the stock market... how it functions and ways to get started with it, we didn't cover much of the technical analysis that goes into evaluating a company much of the terminology around stock trading or even ways to trade without actually having the money you're purchasing stocks with called margin, and that's okay for the beginning investor, the best way to learn the stock market and to get involved is to take some courses to learn.
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