The stock market has been in the news over the past year for more than just positive reasons. For beginners or those starting to take interest in the stock market, it translates a bad image of the stock market. Whereas we cannot separate any entity with negative results, it is important to learn a holistic meaning it before you make any decision. This article will answer all the basic questions you have including ‘how do stocks work?’ and ‘how can you make money through them?’
The stock market is an ideal place to multiply wealth even if you are not starkly rich to start with. We have many real-life examples of people who credit getting into stocks as their main way of building some wealth over time. This is how some of the most successful companies in the world are made available to the general public to invest in. The options in any stock exchange are endless for beginners as well as proficient investors. All you need is proper guidance and knowledge to pick the right moments and make the right decisions. Let’s look at some stock market basics for beginners:
1. What are stocks?
To start with, you need to understand the difference between private vs public companies. There are many different ways companies are run and operated, but the giant umbrella of the corporate world includes two main pathways for companies, private or public.
As the names pretty much illustrate for us, private companies are held privately by the owners, directors, and/or management of the company. The decision-making, assets, profits along with any other means of ownership goes to the owners that have a stake in that private company. Meanwhile, a public company is one that has sold all or part ownership in the firm to the public through shares in the company.
Public companies are what make the stock exchange and Wall street run. Private companies cannot rely on other means of finance for their capital other than debt. This is where public companies are at an advantage, they can sell stocks or bonds to gather capital for their company. Stocks give the general public to invest in companies of their choices through buying shares and becoming a stakeholder in the company’s performance. This is why you get ownership in a company when you buy their stocks.
The general idea is to invest in stocks that bring you profits on your investment over time. Different industries and even companies within an industry have different factors affecting their performance. How a company performs and how it is perceived to perform makes up for the stock value of a company. When a company performs well, or for any reason is expected to do well in the future, its stock value and thus price elevates.
How does a stock market work?
As the name pretty much explains itself, a stock market is a place to trade stocks for buyers, sellers, and brokers. Usually, there are companies listed within an exchange, the buyers or investors, sellers, and brokers. Brokers are basically middlemen who do the buying and selling on behalf of interested investors within the market.
There can be physical locations that are dedicated to stock market operations, but the marketplace is not necessarily confined to those walls.
How do beginners buy stocks?
Buy low, sell high is the go-to mantra of many investors when they go into this market. Meaning you buy a company’s share when its price is presumably low and sell it off when it appreciates, earning you a return on your investment. But how do you realize which companies to buy stocks in and at which time? When to sell for maximum profit? When is it smart to wait instead of selling? And ultimately, how does it all work?. All of these questions are asked by beginners and all of them are valid when you are just starting out as an investor.
What you need to make sure before you take yourself into this complicated world is to learn everything at least in theory. It will not make up for experience in the stock market, but knowing your market is just as important as being there physically. Secondly, a financial analyst or advisor might be a good option to choose if you are serious about putting your funds and energy into stocks.
Lastly, if you are not one for large risks and can be patient with your investment for a secure return over time, you should go for mutual funds that are growth stock-based. A 401(k) for example, is a great way to have your money invested in a consistent mutual fund that is bound to bring your interests over time. Essentially, beginner or not, the market is bound to change and mold according to time and factors affecting it. The main thing for investors to practice alike is to be patient and smart with their investment decisions, be vigilant with where their money can be most fruitfully utilized.
How long does it take to make money from stocks?
Owning stocks within a firm can give you other benefits such as voting rights that some shareholders may get but it does not necessarily mean you get a say in all decision-making within the company. Apart from that, there are two ways you benefit or earn a return through your stocks mainly, direct return from your stock or dividends earned through your shares. The former is the basic stock function, it appreciates and earns you a return on your investment. The latter however is a % of payments made quarterly to the shareholders from the revenue that a company makes. Not all shares pay dividends but some do.
In addition, there are different types of stock investments that are all essentially the same thing, shares in public companies but presented differently.
- Starting with the simplest, Single stocks are basically single ownership within one company. It is considered very risky to go for just single stocks, therefore a smart thing to do is to make sure none of it makes up for 10% or more of your portfolio.
- Exchange-Traded Funds come next, which are basically a combination of high-performing companies in the form of Index funds. They are more diverse than single stocks but are not actively managed by any professional.
- If you have ample money for a long-term investment, Mutual funds are your way to go. It is when multiple investors come together to form a pool of investments that is then invested in multiple companies. It is proved to be the most consistently growing stock investment.
All the basic information you needed to know about the stock market is answered above. We hope this answers your questions regarding ‘how to buy stocks’’ and ‘how they work?’. A stock market is a good place for your investment, provided you do your homework regarding its workings and do not go in blind.