As you gain an interest in saving for your retirement or putting your money to work for you, no doubt you are thinking about learning how to invest in the stock market. However, before you do that, you need to learn the stock market basics.
In this article, I will be revealing the stock market basics that will allow you to understand the stock market, how it works, and how to invest wisely.
Stock Market Basics – What is Stock?
When you buy a share of common stock (normal stock traded on the New York Stock Exchange or the NASDAQ), you are essentially buying a small piece of that company.
However, do not take “owning” a piece of the company at face value. Small-time stock-holders do not get much say in the company’s day to day operations (nor should they). In reality, buying stock in a company is a lot more like loaning money to a corporation than it is actually owning a piece of the company.
Think of it this way: let’s say your company has come up with a revolutionary product that nearly every business in every country can make use of. The only thing that limits your growth is your ability to generate money, as you need more money to hire more staff, get more office space, and create more products of whatever you are selling.
As a result, by going public, you can sell off a portion of your company in order to generate the money you need to support your potential expansion.
So why would people buy stock and loan companies money? Companies that do very well with their publicly-invested funds end up with stock that is more valuable. This means both the company owners (which typically keep quite a bit of their own stock) and shareholders (who bought the stock at a lower price) now have both rapidly increased the value of their initial investment. This makes stock a win-win situation for both investors and business owners.
Stock Market Basics – Bad Investments
When trying to understand the stock market, you need to know that if a company that you bought into does poorly, your stock may actually become less valuable.
If you buy into a public company which then proceeds to not be able to generate a strong return with the money you invested into it, the whole stock and company could lose value.
Companies rise and fall over time and as a result, no stock is truly safe. Even big, powerful companies can get hurt by irregular occurences. Some companies (i.e. Microsoft) get hit with anti-trust regulations which may decrease the value of their stock. An accounting scandal (Enron) or disaster (i.e. BP oil spill) can also make a stock plummet overnight.
You always want to invest in multiple companies in multiple sectors due to the volatile nature of individual companies. Bill Gates (the founder of Microsoft) has stock in multiple companies, so why would you?
Stock Market Basics – Commodities
Another thing that most people do not realize about the stock market is that you can buy actual goods through the market. These are known as commodities. You can buy things like oil, gold, silver, and even foodstuffs (meat, grain, etc).
While having a small portion of your portfolio dedicated to precious metals is a good investment for everyone, I would not recommend commodities for new investors due to their volatile nature. It is much easier to predict whether a company is going to grow or not in the next 2 years than it is to tell what the price of oil will be 2 years from now.
Stock Market Basics – Understanding the Stock Market Conclusion
You should now have a good idea of how owning common stock works. Common stock is the most popular type of investment on the stock market and nearly all investors have money in common stock.
Stock Market Basics – Price Fluctuations
Generally, the better a company does, the most valuable its stock becomes. However, things are not always that simple. In the next article in our understanding the stock market guide, I will be revealing how the stock market works and the specific factors that cause a stock to increase or decrease in price.
Read more in our article: How The Stock Market Works. Some of the factors that influence stock value may surprise you!