Stocks 101 – What are Stocks and How does the Stock Market work?
Most people view stocks and the stock market as a bunch of numbers and symbols that couldn’t be more confusing. In actuality, stocks are the foundation of successful investment portfolios. When a company goes public, it issues a predetermined number of shares of stock to the public and all future company financials must be released to the public.
Stocks are equity investments in corporations that represent part ownership. The level of ownership determines the amount of a corporation’s earnings and assets you are entitled to. A share is one unit of stock within a corporation. The more shares you acquire over time, simply increases your ownership stake within that corporation.
Owning shares of a company’s stock makes you a shareholder, no matter the amount owned. Although you are a shareholder, it does not provide you with the freedom to contribute to day-to-day operations or the right to walk into a Coca Cola factory and leave with a case of drinks. It is the management’s responsibility to increase shareholder’s value, meaning the worth of the shares you own are appreciating.
The critical part of being a shareholder is that you are entitled to your portion of the corporation’s profits and assets. Majority of corporations share their profits through paying dividends. A dividend is a distribution of a company’s profits by cash or new shares, on a monthly, quarterly, bi-annual, or annual basis. The more shares you own; the higher dividend payment you’ll receive.
Being a shareholder has a limited liability position. What this means is if a company struggles or cannot pay its debt, the maximum you can lose is your initial investment. This is where the risk comes in with stock investing. There is no guarantee to earning money in the stock market.
When it comes to the stock market itself, it has evolved from the physical paper certificates to all trades being processed electronically. We can all log online or through an app to buy or sell any stock during market hours – (9:30am – 4:00pm New York time zone). The simple strategy to profits with stocks is to buy low then sell high. That’s it.
The stock exchange is a place, physical or virtual, where stocks are bought and sold. Each company is represented by a one to five letter symbol. For example, Apple Inc. is expressed as AAPL. The prices listed for companies are not shown expressing what the company is worth, but rather what the market (or people) are paying at that current time. Prices will change throughout the day, up and down, based on economic conditions and the business itself.
Investing in stocks can be the springboard for people to accumulate wealth or earn dividend income. But it shouldn’t be treated like a dice roll, because it can wipe out your investment just as a casino will. You should educate yourself before you buy your first stock. Becoming a great investor doesn’t happen overnight, but thorough understanding and smart investment strategies, you will build confidence and, most importantly wealth.