Looking at the current stock market or the market in particular can be very intimidating. The fluctuation of the market in recent years has turned many away from making an investment decision. The economic crisis has made a big impact on the market, but you still see many brokers who are not giving up on investments.
Seeing this, one cannot stop wondering why these people still trust in the stock market to make them wealthy. Well, that’s the thing. In order for the stock market to make you a profit, it needs to fluctuate. The biggest problem with a stock market is when there’s no movement at all. A dead market is not good for anyone: corporations, individuals, stockbrokers… no one. But a lively market always has its winners and losers.
Being on the winning side is the thing we all want, but for beginners this endeavor might be very intimidating. There are so many aspects that make stock markets tick, that it is quite overwhelming even for professionals, not to mention beginners.
The first thing you have to do is learn what a stock is, what stock markets do and other basic things that are often talked about but rarely explained to laymen. That’s why we’re going to give you a crash course in investment so you can start thinking if and how investment can benefit you and your family. Let’s dive right in.
What are shares and stocks?
Shares are parts of ownership of a company. If you buy a share, the company shares its profits with you. When a company goes public, it means that it divides its ownership into a number of shares. If a company divides its ownership into, let’s say, 100 shares and puts these shares on the market, you can, by buying 1 share, own 1 percent of the company. Of course, companies usually don’t divide their ownership into shares so big, nor do they put all the shares on the market for the public to buy.
Why do companies go public?
Companies need investments. Let’s say you have a company and need money for growth. You divide the ownership of the company into 1 million shares. You keep 510,000 shares for yourself so you stay the major shareholder and put the rest on the market at a price of $2 per share. Even if one person buys all the other shares, you’ll still have the majority of the shares. However, there’s often a limit set by owners of the companies on how many shares can be bought by one person.
Anyway, let’s assume you sell all the shares you put on the market. At the rate of $2 per share, your company will get a $980,000 investment (490,000 shares x $2). You can then put this money back into growing your firm.
Why should I give my money to a company?
Let’s stick to the example above and assume you bought 1,000 shares for the price of $2 per share. You have now invested in a company with $2,000. The company takes that money you and other shareholders invest and grow their business. In the best-case scenario, at the end of the fiscal year, the shares you have are going to be worth more than you bought them for. If the company uses your investments wisely, each share could be worth $3 at the end of the fiscal year. Now you can sell those shares at the current price and make a profit of $1,000.
Is selling my shares the only way to make money through investments?
No. There are many different ways to make money by owning shares in a company. Selling them is only one of the ways, but also the most prominent one used in investments. Another way to make money through owning shares is through dividend.
This special kind of shares, called dividend shares, pays you a certain amount of the profits the company made in the last fiscal period. Dividend shares are very rare and it is rather hard to even buy dividend shares. The board of the company decides whether or not the company is going to put dividend shares on the market, and if so, how many.
Let’s say you have 100 dividend shares in a company that made a profit of 1 million dollars in the last year. The board will then decide how much of those profits the dividend shareholders will receive. If, for example, they say that one dividend share will get 0.01% of the profit the firm made last year, your 100 shares will bring you 1% of the 1 million dollars (or $10,000).
Are stocks and shares the only ways to invest in companies?
Shares and stocks are the most common ways to invest, but they’re certainly not the only ways of doing this. Options are another way to make money. These are contracts that enable you to buy certain stocks or shares at a certain price before an expiration date. If there is a firm whose shares are worth $2 per piece and someone is selling you those at this rate, but you don’t have the necessary money right now to buy them, you can negotiate with the seller if he is willing to sell you an option for those shares. You pay a fee you agree upon and set a date of expiration when you have the option to buy those shares at the price of $2. If the share prices of that firm rise to, let’s say $5, before the expiration date of your option runs out, you have the right to buy the shares from the seller at the price of $2 as you have agreed earlier.
This way is a bit more complicated, as different people owning different options for particular shares can drive the actual prices of the shares upwards or downwards. That’s why trading options is best reserved for those with a bit more experience.
Hopefully this run down of basic terms and descriptions of how the stock market works will help you get started in the world of investing.