The stock market can be an intimating place. Countless amounts of money transferring hands on a daily basis, scenes of chaos erupting from the floor of the New York Stock Exchange and horror stories of investors losing it all (and also striking it rich) in one day help feed the image that the stock market it is this rough and tumble, wild west of a business. Movies like The Wolf of Wild Street, which is a great flick, also lend credence to this lawless perception of investing, but with the added bonus of developing an Quaaalude addiction.
However, for the average investor, the stock market is not as dramatic as entertainment would lead you to believe. So, what is the stock market and how does it work then? First it is important to know what a stock is. When you buy a stock, you are basically purchasing a piece of a company.
Stocks are a way for a company to raise money and they do this by issuing shares during an initial public offering, or IPO, and the price of the shares is based on how much is estimated to be worth. Investors will buy and sell the stock of the company, but the company only receives from IPO period.
But what is the point of buying shares? This is where investors can make money, but also where they can lose it. After the IPO, the perceived value of a company goes up and falls and based on this, investors push the price of the company’s stocks up and down. The more valuable a company is perceived; the price of their stock will rise.
There are also perks that come along with being a stock holder for a company. For instance, if you own stock you can eligible for dividends, which is profit from the company, also can have voting rights when major decision need to be made by the company.
Since predicting the stock market is quite difficult, typical investors buy a basket of stock, which takes various stocks across many sectors as a way to insulate itself from one stock plummeting and tanking your portfolio. Many investors risk a small percentage of their capital across a bevy of stocks, so when prices fall they are still safe.
Volume is another key component of the stock exchange and, as you might have guesses, is the number of shares that change hands in a day. Whenever a particular stock has a high daily volume, traders are attracted because it signals that it will be easier to buy or sell the shares whenever they want to. An inactive stock is a red flag to investors and usually avoided.
This is a basic overview of the stock market. There are still plenty more aspects that we can discuss in future posts, but this is a general foundation and hopefully has made the stock market less scary. If done correctly, the stock market can be a profitable investment and it is not as hard as you may think to get in.