If you want to grow your money and don’t want to work till you die, you need to know how the stock market works. Before you start investing, it is recommended that you learn about the basics of how a stock market works.
It is also important to understand what a stockbroker is and how to use it to make money on the stock market.
Learning the stock market basics is important because it involves risks. You need to be aware of what you are getting into. You can’t simply guess or go with the flow when it comes to investing in a stock market.
If you don’t know what the stock market is all about, you will not understand how it affects your daily life.
What are stocks?
A stock is a negotiable security that indicates ownership in a publicly-traded corporation. It represents part ownership of the company and gives you rights similar to a real-life shareholder. If the company does well, the stock will go up in value. If it doesn’t, then the stock value decreases.
In simple words, a stock represents a share in the company you are investing in. Each share is divided into smaller pieces, known as ‘shares.’ You can then purchase these small shares with your investment money to show that you are part of the business.
What is the stock market?
The stock market can be defined as a collection of markets and technologies for public trading of company securities. This is how companies and governments raise cash and trade shares to investors, creditors, and other financial institutions. The first-ever modern stock market was established in 1602 at the Amsterdam Stock Exchange.
The stock market basically represents the buying and selling of shares of publicly traded companies. You can buy or sell your shares at a specific price determined by the market forces of demand and supply.
How does the stock market work?
The stock market is a dynamic system where companies, governments, individuals, and other investors can trade their financial assets. It basically works when there are people who have money they want to invest in businesses or companies they think will do really well in the future.
These people come together in one place where everyone can exchange shares with each other.
How do you make money from the stock market by investing money?
People make money from the stock market in three different ways:
1. Investing to turn a profit:
Buying and selling shares of companies you believe will do well in the future. This is how investors make their money. When you invest to make a profit, it means that you think the share price (selling price) will be higher than what you bought it for.
A company might reward their investors every quarter with a dividend on the stock they hold with them. If you’re lucky, you might get large quarterly payments from investments that have been in the market for a long time. You can then sell this share and collect your dough! Be aware of the fact that not all shares pay dividends.
If you want to learn more about dividends, you can check this article on Investopedia.
3. Initial public offering (IPO):
An initial public offering or IPO is a type of public offering in which shares of a company are sold to institutional and retail investors. This means that when a company does really well, its stock price will shoot up tremendously! The company might offer its investors a chance to invest in it and reap the benefits later.
What is a stockbroker?
Stockbrokers are people who help you trade stocks. These are licensed professionals or organizations who can help you and other investors to buy and sell stocks. Stockbrokers advise their clients on investing their money and taking care of the transactions for them!
There are many different types of stockbrokers, including full-service brokers, discount brokers, and fee-based brokers.
Stockbrokers can also be online platforms where you can invest your money and monitor its progress. You can do this through an online banking or brokerage account, which is really easy to set up!
Are there any risks involved in trading the stock market?
Every investment you make has a certain level of risk associated with it, whether it’s in the stock market or not. The risks can be categorized into three different types:
1. Systematic Risk/ Market Risk:
Systematic risks or market risks are risks that affect a whole market or economic sector. This means that when one company does poorly, there is a chance that the stock prices of all companies in that specific industry will decrease.
The best example for this would be the credit crisis of 2009 which made every bank’s share value plummet!
2. Idiosyncratic Risk/ Unsystematic Risk:
Idiosyncratic risks or unsystematic risks are risks that affect a specific company. This means that if a company does poorly, its stocks will have a greater chance to go down in value.
However, this doesn’t necessarily affect other companies in the same industry. Google can do terribly, and somehow Apple’s stock price will be unaffected!
3. Speculative Risk:
Speculative risk is an investor’s risk by speculating over unpredictable events. This usually occurs at the end of a boom period when investors are willing to take more significant risks for potential returns.
How do you avoid these risks?
It is almost impossible to avoid the risks completely. However, there are a few things that you can do to minimize them:
1. Research properly:
Before buying or selling any shares, ensure you have enough information about the company. Know what they do, who is in charge, and how well their business is actually doing. You can also check the financial status and see how well they record their profits.
Another thing to keep in mind is the company’s industry. Some industries are more stable than others, so it’s important to know what you’re getting yourself into before making any move.
2. Invest only an amount of money that you can afford to lose:
Never invest more than you can afford to lose because the stock market is a volatile place. There will be some terrible months, which will lead to a decrease in the value of your investments.
It’s okay if this happens as long as you have a plan and stick to it. You shouldn’t panic and sell all your shares at once! The fallen price of stocks often rises back to their previous high and sometimes exceeds it.
3. Diversify your investments:
To minimize the risk further, try to make a balanced portfolio. If you invest your money in more than one company, your shares will be less likely to lose value if something goes wrong with any of the companies that you hold.
If you put all your money only in a single company, your risk is higher than if you spread it out on multiple companies.
4. Educate yourself more:
The more knowledge you have, the better prepared you will be for whatever decision you make in the stock market! Keep up with current events and try to learn as much as possible about how everything works so that you can gain some valuable insight before you make your choices.
5. Follow the market leaders:
The stock market is like a game of chess with many people playing at once. The best thing to do would be to watch the big players’ moves and copy them! This means following the top companies in your industry closely so that you can buy or sell your shares accordingly.
Benefits of investing in the stock market:
There are many benefits to investing in the stock market; here are some of the five most important ones:
1. Make passive income:
Since companies usually reinvest most of their profits, the stocks that you own will increase in value as time goes by. You can then sell those shares and make a nice profit! The dividends paid out to shareholders also count as one form of passive income for stockholders.
2. Have control over your money:
One of the biggest benefits of investing in stocks is that you have control over your money. You can choose to hold on to your stocks for a long time or sell them off quickly if you want!
This means that no one else will be able to tell you how and when you should use your hard-earned funds, which is definitely a good thing.
3. More returns than any savings or fixed deposit accounts:
The returns on investment in stocks are usually higher than any savings or fixed deposit account you can get. You can easily make 12%-15% returns yearly. However, this depends on the market, the industry, and how you invest your money.
Related Article: Why investing is better than savings.
4. Diversification of assets:
Another benefit of investing in the stock market is that it allows you to diversify your assets. You are not just restricted to having cash or buying property. Shares offer another option that investors can use to grow their money.
5. Secure future:
Finally, investing in stocks is a good option for securing your future. This means that you won’t have to worry about money as much when you retire. But it also means that you aren’t restricted only to the usual retirement options of buying an annuity or putting your money in pension funds.
Basically, the stock market is where you can buy or sell shares in companies. You can also make money from dividends that are paid out to shareholders.
It’s important to diversify your investments when playing this game because there will always be ups and downs. But if you do your research and invest properly, your money will grow at an exceptional rate.