The stock market can be confusing. Most of the time we just start investing knowing that this is what we have to do to multiply our money, but we rarely take the time to understand what it means to own a stock.
In this article, I will tell you about the stock market and why we use it as a vehicle to grow our investments. A better understanding of this and why you are investing will make you a better investor in the long run.
What is the stock market?
The stock market is a market system in which publicly traded shares of companies are traded back and forth. Owning shares in a company is like owning a small part of the company itself. This allows people to participate in the overall success (and sometimes failure) of the company through dividends, profits and losses.
Shares are traded through stock exchanges. The two largest stock exchanges are the New York Stock Exchange (NYSE) and Nasdaq (NASDAQ), founded in 1792 and 1971.
Once upon a time, when you bought or sold shares, you were given a paper certificate confirming your ownership of the company’s shares. Today, all of this is done electronically.
The stock market has two sub-markets: the primary and secondary markets. The urgent need arises when a company decides to go public to raise capital (cash) and issues an initial public offering or IPO.
Large investment firms will be the first to be able to buy shares, which they do in the primary market. Once a majority of the original shares have been purchased, these investment firms will resell the shares on the secondary market, commonly referred to as the open market or stock market.
For example, investors buy shares through their favorite online broker through the secondary market.
So what does it mean to “own shares”?
Owning shares in a company or owning shares in a company means that you own part of that company. Before you start thinking, you must put on a suit and enter the headquarters to command everyone around; remember how much of the company you own.
Most likely, it is very small, and you have practically no power. Sorry for breaking it to you.
Think of it this way. At the time of this writing, Apple (AAPL) has approximately 16 billion shares outstanding and available for trading.
Let’s say you want to invest $10,000 in Apple today. At the time of this writing, Apple’s stock price is $141.54. With $10,000, not including brokerage fees, you’ll end up with roughly 70 Apple shares. Congratulations, you own part of Apple.
Remember I told you they have 16 billion shares outstanding? Take your 70 shares and divide them by 16 billion:
70/16 billion = 4.375 × 10^-9 percent (in other words, microscopic).
As you can see, you own a small stake in the company, so you won’t have much influence on how they operate in terms of voting rights.
I did this so you can switch your focus to what it means to own shares in a company. Although you own part of the company, it is a tiny part. The more significant benefit is that you now have rights to the profits and assets of the company.
For example, some stocks pay dividends. As the company makes money, it can pay out dividends – or a portion of the profits – to its shareholders. The more shares you have, the more you will earn if and when they pay dividends.
Guess who will benefit if the company is acquired or goes bankrupt and liquidates its assets? The owners do. Now, if your company goes bankrupt, it will have to pay off all of its creditors before you get anything, so an acquisition is a much more rewarding investment (obviously).
By owning shares in a company and by owning a part of a company, you benefit from the success of that company. And if you’re a great investor, you benefit from the fear of other investors when they sell shares in a panic.
What are ordinary shares?
When you buy shares in a company, you are buying what are known as common stock. This shareholding is the most basic and common type of company shares.
As I said above, when you own common stock, you own a portion of what the company owns and are entitled to its profits and assets. In addition, common stock usually carries voting rights, which means you can vote on matters relating to the company.
While holding common stock is the easiest way to invest in a company, it also comes with the most risk. If the company goes bankrupt, you may not get anything back. For this reason, many people choose to invest in other types of stocks or securities (ie, an ETF, index fund, or mutual fund) when starting out.
What are preferred shares?
Preferred stock is a type of stock that typically offers investors a higher dividend yield than common stock. This is because the company is more likely to prioritize preferred shareholders when it comes to paying dividends. Preferred stock holders usually have no voting rights and cannot sell their shares unless they are offered to the company first.
What are property units?
A unit of ownership is another name for a share. When you own shares, you are considered the owner of that company. You have the right to vote on important matters, such as who will be the CEO of the company. You can receive dividends if the company is doing well.
Why do companies want to go public?
State-owned companies are a huge part of our economy, playing a significant role in basic capitalism and our savings and pension system. Without the ability to invest in a public company, there would be no stock market and therefore no central platform to increase our savings leading to retirement. We’ll have to take risks in real estate and art.
Going public is a way for growing companies to raise money, grow even more, and do it much faster. By “going public,” a company allows others to own part or all of the company. In exchange, the company receives funding for growth (money).
Think of it like a Shark Tank show, only the small business people are the company and the investors are the big institutional investment firms. They give the company money in exchange for a stake in the company. It’s much more complicated, but it explains why the company wants to go public – for growth.
What causes stock (and market) prices to fluctuate?
What’s interesting about stock prices is that their ups and downs are not directly related to the company’s overall performance. If a company is doing poorly financially or if it fails its latest product, this does not in itself cause the share price to fall.
Remember, we are all business owners. The price of a stock is determined by many factors, and it is often our reaction to these factors that causes the price to move.
For example, let’s say you own shares of Apple and see their CEO charged with multiple counts of fraud. In this case, you will probably panic. While this may eventually end in the collapse of Apple, the final drop in the stock price is caused by the panic of your fellow owners. They all suddenly want to sell their shares.
When there are more sellers than buyers, the stock price falls. This is basic economics. Let’s say you’re selling apples at a farmers’ market and 100 other people are selling the same apples as you. In this case, you could not accurately set a premium price for these apples. You will have to significantly reduce the price to attract a buyer. The same is true for individual stocks.
Other factors such as news, natural disasters, poor financials, acquisitions (and the list goes on) can affect the share price. However, it is almost always an indirect relationship between buyer and seller.
The same is true for rising prices. Suppose there is news that Apple is releasing a revolutionary new computer. In this case, it can increase Apple’s profits, which always suits its owners. Therefore, if all owners are aware of this, they may want to keep their shares or wait for a much higher selling price. In this case, the share price would go up (more buyers than sellers).
Summary
Is it worth investing in the stock market? Short answer: yes. But you must know what you are doing first. The first step is to find reliable broker. Then you need to start learning basics of investing. Take the time to read our investment articles archive and you will become knowledgeable in no time.
Frequently asked questions about promotions
Where do many investors put their money?
Many investors focus their money on stocks. This is because stocks are part of a company, and when a company is doing well, stock prices rise as well.
What is market capitalization?
Market capitalization is the total market value of a company’s outstanding shares. It is calculated by multiplying the share price of a particular company by the number of shares outstanding. This gives you the total market value of all shares in the company.
What is a company’s profit?
A public company makes a profit from its activities and is reflected in the income statement. This is what is left after deducting the cost of goods sold, operating expenses and interest payments. Profit can be divided into three categories: company profit, cash flow and EBITDA.
What are mutual funds?
Mutual funds are investment vehicles that allow people to invest in a group of stocks or other securities in order to spread risk. When you buy shares in a mutual fund, you are buying into a pool of money collected from many different investors. This money is then invested in various securities, which helps to minimize your risk if one or two investments fail.
What is a fund manager?
A fund manager is an individual responsible for the management of a mutual fund. This includes making investment decisions about which securities to buy or sell and overseeing the fund’s day-to-day operations.