How do stocks and market work?
Stocks are issued by almost every company in the world. They are used to represent a person’s degree of ownership in a company that can be traded on various stock exchanges. This allows stockholders to gain profits, influence the company, and a lot of other things. In a nutshell, stocks are securities representing the person’s ownership in a company. The sizes of stocks vary — it is possible to invest money in both big and small companies, with high or low sums. It all depends on the potential for profit and available choices on the market.
When somebody purchases a share of a stock, that person becomes one of the owners of the firm. Keep in mind that only a percentage of the company is owned when purchasing a stock. So, if you spend $1000 to buy a share and its value rises by 10% while you own it, the profit is going to be $100 from this investment.
That is why investors are so eager to purchasing stock on the market. People invest money in successful companies and get profits if everything goes on well enough. The higher the achievements of a company are, the higher is the value of the stocks issued by it. Companies use money from the sold stocks for various reasons, like reaching some growth goals or managing different expenses. The funds can be used in all kinds of ways — hiring new workers, product researching, advertising, other investments.
Usually, purchasing stocks is not difficult at all — you only have to pay the sum requested by the market with the help of a stockbroker online. After your order is confirmed, the stock is your property and can be sold whenever you want. Of course, you would want to wait for the value to grow to get some profit.
Holding stocks gives you some benefits. As a partial owner of the company, you share company profits, vote and approve changes, take some part in the company’s life.
What is the stock market?
Stock markets are divided by many criteria. There are plenty of them, and they all differ in working hours, traded stocks, and other details. The most famous markets are the NY Stock Exchange, the London Stock Exchange, and the Nasdaq. These have their operating hours and are not always available. When you plan on investing or trading, keep in mind that you have to check the working hours first!
Stock markets give investors the possibility to:
- Trade stocks.
- Issue stocks.
- Get money from the stocks sold.
- Purchase their stocks from investors.
- Purchase or sell stocks of other companies.
All this can be done on an online exchange or over-the-counter. The second variant is not that common and includes making deals by phoning, emailing, using specific electronic trading systems.
Successful and efficient stock markets include stocks of companies from all around the world. All the markets depend on investors, traders, and companies. The first two groups earn their main profits on the price changes of their shares, while companies get funds by issuing stocks. Good markets make it easy for all the sides.
Stock market indexes are another critical detail when working with stocks. This is something a lot of investors use when deciding whether to buy or sell their belongings. Indexes represent the overall performance of a specific market. One of the most popular indexes is the Dow Jones IA, which includes the 30 most prominent companies in the world. These include Disney, 3M, and others.
In a nutshell, stock indexes give analysts and investors a possibility to have a glance at the way a particular group of stocks performs. By watching the Dow Jones index, people can usually get an idea about the overall market performance.
Using stockbrokers is required to buy a share of stock online. A broker acts as an intermediary that is capable of getting the purchased stock in a moment. Investors enter all the required data on the brokerage platform, such as the stock they wish to buy, the amount, and the price range, which is called a “bid” and sets the value at which the trade will be completed. The same thing happens when an investor is willing to sell his stocks. But here he sets an “ask price” or “offer,” as he is the seller.
Traditional stockbrokers are gradually losing their positions. This is the effect of the current digitalization, which moves almost every aspect of our life into the online world. The same goes for stocks — people prefer buying and selling them on the internet.
Types of stocks
There are three primary forms of shares available. Let us have a closer look at them.
Having a share of stock of this type gives its owner one vote per each share owned in company events for shareholders. The more stocks are owned, the higher the influence of a stockholder is. This type of stock is considered to be the most popular around. Not only does it bring profits from rising in value, but it also often makes its owners eligible for receiving dividend payments. This is common for big and successful companies as they often have more assets than new ones.
The owners of preferred shares are prioritized over the owners of common stocks. Usually, the priority is shown in earnings, payments, etc.. In a nutshell, if a company suddenly becomes bankrupt, the owners of preferred stocks receive their payment after the company’s debt and before the dividends (if they are paid) to common stocks owners.
What are the dividends? These are the profits earned by a company and paid to its shareholders. Dividends are not guaranteed — companies decide themselves whether they want to pay them, the sum paid, etc. But it is vital to notice that the value of dividend stocks grows when dividends are received as a lot of investors would like to have such stock in their portfolio.
Why should you buy shares of stock?
The first thing why stocks are purchased is profit. But this is not the only reason investors spend money on them. Here are some other ideas:
- Making money. When stock becomes more expensive, it is good for an investor in all ways — he can sell it and get more money than he spent to buy it;
- Earning dividends. This does not work with all companies and is only good enough for shareholders of successful companies;
- Gaining influence at a company. Each share of stocks gives its holder a possibility to vote at specific events at the company;
- Outflanking inflation. Inflation is everywhere, and you cannot hide from it, that is why people prefer investing their money in safer stocks;
- Saving money for retirement or other long-term objectives. You never know how much can a stock grow in a 30-50-100 years period. The earnings usually are bigger than those received from bonds or bank deposits, so people use this as a better way to get a long-term financial profit.
As we can see, there are multiple reasons. One thing is clear — all of them are profitable for the investor in their ways.
Why should you sell shares of stock?
After purchasing stocks, investors have the possibility of selling them whenever they like. Let us have a look at the conditions for selling a stock.
- It is making profits. Imagine that you have bought a share of a stock for $100, and in 10 days, its value increased till $150. If you sell it, there is going to be a profit of $50. Sounds good, doesn’t it?
- There are high risks. When shares grow in price significantly, investors decide to sell part or all of them to manage their portfolio and make it balanced and less risk-taking;
- There are worries about the company’s situation. Various situations can bring companies troubles. An example was with EA when a soccer player Ronaldo, refused signing a contract for using his personality in a game called FIFA — the prices of EA’s shares fell significantly. If the stocks are sold on time, the owner will evade losing money and even get a possibility to buy them back later for a cheaper price;
- Another stocks offers better opportunities. If the owned stock seems to have no prospects, but another stock of the same value does, you might want to “swap” them.
The same as with purchasing, selling stock shares also has multiple reasons.
The meaning of a stock price
Investors measure the overall worth of most companies by analyzing the stock price. Most investors want to buy a stock for a lower price and sell it for a higher value. The stock price also represents the sum others will be ready to pay for it. This is one of the reasons for stock indexes to track the prices closely.
Analysts and professionals also use these criteria as an indicator of the company’s financial health. Bad results might show that something has to be changed in the way it is managed.
Stocks are significantly affected by any news and earnings related to the company. When an investor is thinking over adding a company to his portfolio, he would most likely check the stock value history of the company. This would work as an indicator of its financial health and also means that stock prices show how confident are other people investing their money here. An increasing value shows the rise of confidence, and on the contrary, a decreasing value shows the lack of confidence.
Stocks have successfully past their history test of making profits. They even rank higher than a lot of securities when we speak about income and efficiency. Your success in this field depends on your understanding of the market and self-education in everything related to stocks.
As it was said in an old proverb, “Non scholae, sed vitae discimus.” Do not waste your time on anything — better spend it on learning something new!