Understanding the stock market for beginners starts with understanding some stock market basics.
Buying a stock means that you own a part of a company. A stock is the smallest share that is possible. A stock is issued by companies who raise capital to sell a portion of their company. Those who hold stock also hold the right to voice opinions about how a company runs and share the profits (if any). Even though stock owners have some rights, they do not face responsibility if the company faces a lawsuit or defaults. The worst that can happen to an investor is that their stock will have no value and they will lose their investment.
When a company sells stock, they want to raise capital. They might need extra cash or need to purchase new property. A stock issue has a limit to the number of shares. When they are issued, the stocks are assigned a par value. However, the market will soon adjust par value due to the success of the company and its projected value to grow.
An investor decides to purchase stocks when they think that a company will find success and the stocks will rise in value. Those who buy stock from a new company are taking on a greater risk because there is no guarantee that the company will be successful. Those who invest in a well-established company will have a lower potential risk, but their potential for gain is less. For example, those who purchased and held onto Microsoft shares in the beginning saw a great return on their investment.
Stock trading takes place within stock exchanges such as the NASDAQ (National Association of Securities Dealers Automated Quotation System) and the New York Stock Exchange (NYSE). This means that companies who are on this system of public exchange can have shares that are sold on the open market. An investor could also choose to purchase a small company that isn’t on the stock exchange. That type of purchase is completely different than just buying stocks.
An investor should have a broker help make transactions for him because stocks must be sold and bought on a stock exchange. A broker’s job is to take orders from a client and buy or sell certain stocks. The investor may give the broker orders to trade when a stock hits a particular price or what the market can take. When a broker gets a specific instruction, they try to fulfill it by finding an appropriate buyer or seller. The broker works with another broker who represents another buyer or seller. Each broker will get a commission for the sale.
Stocks can be more beneficial than other savings investments. They represent owning a portion of a company and the right to help make company decisions. A share equals one vote. In most cases, shareholders are asked to voice their opinions on important decisions. A stockholder also will get money from profits that the company acquires. Profits are give as dividends that could be doled out once or twice a year as the company sees fit.
When a company is successful, stocks will rise accordingly and profits will increase. However, if a company is not doing well, the value of the stock could plummet.
Stocks have the potential to gain more money than the average investment, like bank certificates of deposit and bonds. However, they also carry a greater risk. Investors should be educating themselves about the stock market and find the right type of strategy to use to make the greatest profit. Many will find that they will make more profit in stocks than other type of investment.