The stock market may seem out of the reach of beginning investors. But by understanding just a few basics, anyone can be on their way to mastering the market.
In gaining a better understanding of anything, it often helps to break things down to their most basic elements.
What The Heck Is A Stock?
Seasoned investors reading this article probably find it funny that anyone wouldn’t know what exactly a stock is, but this is an article for beginners.
Stock is how a public company is collectively owned. Each share of stock that is bought and sold by investors represents a tiny fraction of the business.
An example of stock on a small scale would be 10 people forming an equal partnership to open a bakery; the bakery could be considered to consist of 10 shares. If the company earned a profit of $20,000, the earnings per share would be $2,000.
It is up to the shareholders how they will reinvest the profit. They could pay themselves or use the money to grow the company. One owner may decide to sell his stock in the company and get out of the business, or another may want to buy a portion of one of his colleagues’ stock to hold a bigger stake in the company.
The same basic idea applies when thinking about the structure of a modern corporation, except instead of 10 shares, there could be billions. A company may elect to “go public” and be traded on the stock market to increase funding for growth.
To make sure the shareholders are represented in the company, they can vote to elect people to the company’s board of directors on an annual basis. Leadership, like the chief executive officer and other top management positions, is then appointed by the board.
Stock Is Bought And Sold On A Stock Exchange
Because modern corporations can be broken into so many shares of stock owned by different people, buying and selling shares in an informal manner would be difficult. That is why dedicated stock exchanges like the New York Stock Exchange (NYSE) on Wall Street, NASDAQ, the London Stock Exchange and the Tokyo exchange exist to provide a marketplace for the transfer of stocks.
Where Do You Start If You Want To Buy And Sell Stocks?
There are a number of ways to get started in the stock market, and there is no best option for everyone. Determining your best method of investment depends largely on whether you want to pick individual stocks, how much money you can invest and what your goals are.
- A stock broker can act as a middleman between you and the market, provide investment advice and help you plan for the future. But that will cost you; and, if you aren’t careful, those brokerage fees can add up fast.
- Direct Stock Purchase Plans are vehicles for investment for people who don’t have or want a traditional brokerage account. For the beginning investor, that often means that the stocks can be bought and sold directly without paying hefty commissions that often accompany the services of a stock broker.
- Mutual funds don’t allow you to buy individual stocks, but rather give a group of investors the opportunity to put their money together and buy shares of many companies in one big fund.