The stock market can be an intimidating place for a beginner. Many terms are specific to the industry, and knowing which stocks to buy now can often be confusing. However, if you know the basics of trading stocks successfully, you’ll be on your way to becoming a knowledgeable investor. The first step is understanding what stocks are and how they work. Here’s a quick rundown of what you need to know about this investing method that could make all the difference for your future.
The ABCs of the stock market
Stock trading is a form of trading that involves purchasing a limited number of shares in a company, essentially a business. When you buy stock in a company, you make a large purchase of a certain amount of a specific asset. For example, in the case of a large company such as Apple, you might be buying a stock in the name of Apple, Inc. You are then allowed to hold these shares in your portfolio for a specific period, usually one year, before you can sell them. At that time, if you still wish to hold on to them, you must do so within a specific price range. Various stocks exist, and each has its own set of rules to help the business prosper. One of the most common types of stocks that you will find are listed on the stock market.
What are stocks?
Stocks, also known as companies, are named that because they’re given the status of “shares.” But with many stocks, you won’t actually own the individual item being traded. Instead, you’ll own shares of a particular corporation. For example, let’s say you own shares in a particular blue-chip company. If a large, unnamed rival company has its sights on buying out the company, the stock exchange says your shares will be worthless. This is known as a hostile takeover.
Additionally, you may own a fraction of a company, known as a fractional ownership share. This is akin to a stock, except it represents a fraction of a company’s total worth. A fractional ownership share could be in the form of a fraction or share.
How are stocks created and traded?
Traditionally, companies have had to go through a lengthy process of going through the U.S. Securities and Exchange Commission (SEC) in order to release a stock. They had to fully file their financials, and the SEC had to approve the process and determine that the security could be sold to the public. For those who don’t know, the SEC is an organization that works to protect the public. It investigates fraud and fraud related to the capital markets, and it looks out for the best interest of investors. When a company decides to go public, it must file an “initial public offering” (IPO) with the SEC, which means that anyone who wishes to invest can do so. It’s a chance for people to invest in the future of the company without worrying about the quality or lack thereof of the actual stock.
Why invest in stocks?
Just like any investment vehicle, stocks work for a specific reason. The main goal of the stock market is to get people to invest their money in stocks. The more people who invest, the more money you can make. It’s a zero-sum game; when someone buys stocks, the stock is divided, and the owners receive shares of the company. When someone sells their stocks, the sellers get back their money. This makes investing the same way you’d play the game Monopoly, where you move around the board to collect your money and increase your holdings until you reach a point of ownership. When you start a game, there are only so many houses, hotels, and railroads you can get, and once you’re done with those, you move on to playing money and properties.
What risks are associated with investing in stocks?
Stocks are essentially just a method of investing, but they offer unique rewards. Like other investments, they’re highly liquid, meaning you can buy and sell them like regular currency. There are two main risk factors for stock investing: the probability of losing money, and the difficulty of winning it back. Like all investments, stocks can fluctuate in value due to the whims of the market. They can be affected by a number of different factors, like a company’s earnings performance, volatility in the overall economy, or even the movement of the U.S. dollar. If a company’s earnings performance falls short of analysts’ expectations, its stock can take a hit, or the entire company can be sold off.
While the stock market can be a complex process, you don’t need to know everything to invest successfully. By understanding how the stock market works, you’ll be better prepared to approach it and find the stocks that best suit your investing style. This way, you’ll be able to start earning a steady income without the emotional stress of an experienced trader.