I remember back when I was 21, a friend (who is a stock broker) introduced to me the stock market and the idea of trading in stocks. At that time, I was actually earning more than what I needed for my daily expenses so without further delay, I told him that I’ll invest to make my money grow.
Technically, I invested my money because my friend gave emphasis on the positive benefits of stocks without really explaining everything about it. Being on graveyard shift at that time, and probably because of my young age, I never really gave importance about learning the stock market and what it really means to invest in it. To cut the long story short, After 2 years of investing, I had gains and losses but if you would sum up the time I spent on leaving my money in the stock market, it was actually a loss for me.
Because of this experience, I realized that before you invest in something, you should take time learning the investment vehicle first before actually venturing in it. This will then help you minimize your losses and decrease the level of risk.
Well, that’s it for my 1st venture in the stock market; let’s now discuss about the said topic.
The stock market is not simply a playground for the rich or intellectual elites. It’s simple enough for everyone to understand and profit from with a little education. In this post, I will try to provide an easy to understand yet thorough explanation of how the stock market works.
What is the Stock Market?
The stock market is where companies offer shares (stocks) of their company to the public. The public can purchase these shares in order to “own” a piece of the company. This would then raise two questions: why would companies want to sell these shares and why would anyone want to buy them?
Why Do Companies Sell Stocks?
I believe there are 3 main reasons why companies offer stocks to the public:
To Raise Capital: Companies need money to help them grow. They use it for all kinds for things like buying materials to make their products, developing new products, building plants and hiring people to work at their companies. To do this, they often split ownership of their companies into smaller “shares” that they sell to the public.
For the Owner and Initial Investors to Profit Without Selling the Company: When the company goes public, the founders can sell some of their shares in order to make money without actually having to give up control of the company.
To Reward Staff: Going public also allows a company to pay its top performing employees with stock options or shares instead of just cash. This allows the company to pay its staff without hurting revenue and can incentivize employees to perform at a higher level. After all, if the employees own shares of a company, the value of those shares is dependent upon the company’s success.
Why Do People Buy Stocks?
I believe there are 2 main reasons why people buy stocks:
The Shares Will Increase in Value: The primary goal of investing in the stock market is to buy shares of a company that you believe will become more valuable over time. As a company grows, expands, and ultimately increases its earnings, the company itself becomes more valuable. When the company becomes more valuable, so do the shares that represent that company. If you are holding shares of that company, then you can sell those later at that increased value.
The Shares Pay a Dividend: Sometimes good performing companies give some of their profits to shareholders with cash payments called dividends. Dividends provide great returns over time, especially if the dividends are used to purchase additional shares of that same stock. This is the other way to make money from stock ownership.
What Are the Risks of Buying Stocks?
While you may be ready to venture into the stock market after reading the explanation above, understand that there are risks to investing just as there are rewards. As I mentioned, I ventured into stocks upon hearing the benefits without thoroughly learning about the risks and negative side of owning stocks.
Just as the company’s shares can increase in value, they can also decrease if investors value the company less. If the company makes less money than it did in the past or if it simply stops growing as quickly, share prices can lose value. If a company goes out of business, share prices can lose all value, leaving investors with nothing to show for their original investment.
A company does not have to go out of business completely in order for it to lose share price. Often, investors speculate that a fast-growing company will become very successful and drive the stock price up to a high level based on this belief. If the company fails to live up to these expectations, the stock price could drop dramatically, even if the company is still doing relatively well.
Well that’s it for now; always remember that every investment has risks. The higher the risk, the higher the reward. Take time to learn more about your chosen investment vehicle and for sure, you’ll be ripping the rewards of your effort sooner than you ever expected.
“The stock market is a device for transferring money from the impatient to the patient.”
– Warren Buffett
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