What is the stock market?
Don't let the term intimidate you, its actually pretty simple concept once you think about it. When you hear the term "Super Market" or "Market" in general, chances are you think of a grocery store or a central location where people go to purchase goods. Now what do you think of when you think about the stock market?
The stock market is a central location where stocks, bonds and investment vehicles are bought and sold. Its a digital marketplace where buyers and sellers meet to negotiate buying and selling of different types of investments. The two main stock marketplaces today are in the United States are the "New York Stock Exchange" (NYSE) and the "National Association of Securities Dealers Automated Quotation System" (NASDAQ). While there are other large and well known stock exchanges, these two remain the largest and most well known.
"I Don't Have The Money To Invest"
It's one of the most common excuses that people don't start investing in the stock market. The reality is, investing just isn't a priority for you if that's your response. If you knew that you could start investing with as little as $5 would you have the same excuse? That's just half the cost of a mediocre lunch!
Make investing a priority even if it's just a few bucks here and there. It ads up quickly, and before you know it you will have a nice pile of cash you forgot you'd been contributing to.
Clarifying examples of the stock market
The following examples may help clarify what the stock market is, and how it is very similar to other marketplaces you and I use regularly.
Example #1: Amazon
- We're all familiar with the eCommerce giant, Amazon. Amazon is a "market" where consumers go to purchase every day goods. Small businesses and individuals are able to list their products on Amazon and sell them at a competitive price, and customers will make a purchasing decision on whether they think the product being sold is really worth the asking price.
- Just like Amazon, the stock market is a central marketplace where investment vehicles, aka "securities" are bought and sold. The price of the investment vehicles is set based on what consumers are willing to pay for it.
Example #2: Walmart
- Walmart is perhaps the largest "brick and mortar" retail giant, with one of the largest online retail marketplaces. Walmart differs from Amazon in that they have a large physical presence in thousands of cities worldwide. The stock market originally started out as a physical location where buyers and sellers of investment vehicles met to exchange stock certificates, or physical papers/certificates of a share of stock.
As technology evolved over the years, the stock market is purely a digital location where investors and businesses meet to buy and sell investment securities. What began as a physical location where consumers and businesses exchanged stock certificates, evolved in to a digital marketplace that drives our economies today.
How to invest if you have no experience and can't hire an expert
A common reason many don't get involved in the stock market is because they are scared of making a mistake due to no experience or lack of knowledge. Don't let this be you, there are sure ways to address this issue.
Now days, you don't have to pay high commissions to a hired financial adviser, and you can begin investing with as little as $5. This leaves no excuses for new investors to get involved in growing your money.
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Upon account set-up, they ask you a few basic questions to determine a good stock portfolio mix, and they take care of the rest. The cost? $1 per month (you'll probably make that back the first day you sign up).
What is a stock?
A stock is a share of ownership in a publicly traded company. As mentioned previously, the stock market originally began as a place where buyers and sellers traded stock certificates. The certificates represented a percentage of ownership in a publicly traded company. Not all companies hold shares of stock that are publicly traded on a major stock exchange.
Publicly traded refers to a company that offers shares of stock to the public to buy and sell in exchange for ownership in the company. Most local small businesses you may be familiar with in your local city are most likely privately held companies. This means they are simply owned by a person or partnership and do not offer shares of ownership (aka shares of stock) to the public.
When does a company decide to offer stock shares to the public?
When a company first starts as a small business, and gains traction among the public with their product or service, they need extra capital to expand and grow the company. One way of achieving this is by offering public shares of stock to anyone wanting to buy into the growth of the company.
One example of this is the now publicly traded company, Facebook. What began as a private company that grew in popularity to the point that they needed more money to sustain the growth of their business, soon became a publicly traded company offering shares of stock to the public. Facebook offers you and I a share of ownership in the company, in exchange for our money to contribute to the growth and expansion of Facebook.
If you or I believe Facebook is a strong company that is going to grow over the years, we would purchase shares of Facebook stock. Those stock shares represent a percentage of ownership in the company. If the value of the company grows over time, we can then sell those shares at a higher price for a profit.
What determines the price of a share of stock?
The easiest way to understand how the price of stock is determined is to compare it to an auction. Picture a local auction that is selling famous paintings to the public. The auctioneer stands on the podium and announces the painting and the starting price. What do you think determines the selling price of that painting?
It all comes down to the basic economic law of supply and demand. Is the painting rare? Or are there thousands of similar or more popular paintings available? If it is a rare painting and it has a large number of people who want it, the price of that painting is going to keep going up until it reaches a high point, resulting in the auctioneer shouting out "SOLD! for $XXXX to the guy in the back row".
The stock price of a company is determined in the exact same fashion, just a much...much larger public auction. The larger the audience is with interest in said company, the higher the price will go. The smaller the audience is with interest in said company, the lower the price of the stock will go. This is why stock prices rise and fall from day to day.
Why invest in the stock market?
Now that you understand the basics of the stock market and how it works, you're probably wondering "OK, that all makes sense, but why would someone invest in the stock market?"
While that question has a potentially very broad response, the quick and easy answer is...TO MAKE MONEY! Some invest in the stock market to grow their money for retirement, or to save money for a large purchase they plan to make in the next few years, and others buy and sell stock shares daily to make quick gains. They buy the stock at a price, and sell it for a profit when the price rises. This is called "Day Trading", and is very risky way to participate in the stock market.
Just like the social media giant Facebook began as a small local business, it's now a large worldwide company. Imagine if you had invested in Facebook when it was in it's infant years? Remember that each stock share represents a percentage ownership in the company, not a dollar amount.
So if you owned a share of Facebook when it was first publicly traded at $38 per share of stock, and you bought 100 shares (total of $3,800 purchase price), today those same 100 shares of stock would be worth roughly $200 per share (as of this writing) equating to a total of $20,000! Not a bad return on investment!
The stock market as a whole historically rises over time. The idea of buying stock and holding onto it for years to come has held to be sound investment advice that has made many people multi millionaires and even billionaires (like Warren Buffet, for example) today.
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