The stock market is a marvelous place where billions of dollars trade hands every day. The right transaction on the market can make a poor person rich and a rich person richer. One bad choice, however, could wipe out an investor’s entire life savings in an instant.
But what are stocks, exactly? Furthermore, why do so many people care about owning them?
If you ever asked these questions, fear not. It’s not as difficult as it sounds.
A stock is an electronic record or piece of paper that proves you own part of a company.
With a share of stock — or an infinitesimally small percentage of ownership in an entire company — you can claim ownership a certain amount of a company’s profits.
People buy stocks through brokers and investment firms. These people trade (sell and buy) stocks between a buyer and a seller, or between a person and a company.
They act as the middleman for these transactions, collecting the price of the transaction and a fee for their duties.
You could only buy shares of stock for companies listed on the stock market.
These are called publicly traded companies, who sell shares of their company to anyone willing to buy.
The price of shares are never set in stone.
They go up and down constantly based on the law of supply and demand, among many other factors. Supply is constant, meaning the amount of shares available of a stock is, barring certain circumstances, set in stone. If more people want shares of a certain stock, that means more demand exists, and the price will go up. If there’s less demand and still the same amount of stock, the price per share of a stock will decrease. Countless things can alter the demand (or lack of demand) for a stock. Few things can alter the supply.
Let’s say you want to buy stock in Funtime Cardboard Company, a fictitious company that makes cardboard boxes.
You contact your broker on Monday to buy 10 shares at $50 a share. This costs $500 plus the $10 fee you owe your broker, bringing it to a total of $510. You will never get that $10 fee back, but you’ll make it back if the stock increases.
On Tuesday, everyone in the world falls in love with cardboard boxes from Funtime Cardboard Company.
They’re the new Pokemon GO, and everyone wants one. This will create more demand for their stock, which causes their stock price to go up to $53 per share. Your original $500 purchase is now worth $530.
But wait! On Friday, everyone stopped caring about Funtime Cardboard’s boxes.
Demand for the product — and thus the stock — is down, and the share price decreases to $49. Your original $500 is now worth $490.
You could sell your existing stock at a loss.
You could also keep the existing shares and wait (or “go long”) until Funtime Cardboard’s stock goes up due to future demand, new and successful business ideas, and a variety of other factors.
When you sell your stock after making a profit (or “gain”), you’ll have to pay taxes on whatever those profits are.
You never have to pay taxes on your shares until you sell them.
The goal of buying stocks is to always make more money than what you originally put in.
You can achieve profit when the stock shares gain in price, when the company pays a dividend (a portion of their profits), or if the company is acquired for more than the stock is currently worth. There’s much more to stocks than simply buying them. You can trade them, bet against them, speculate on their future prices, and much more.
Only one thing is certain about stocks: no one truly knows exactly how much they’ll be worth in the future.
If one did know the exact future worth of a stock, they would either have to be a time traveler or an insider trader.
Stocks can go up or down due to many factors, so there’s always some risk involved with investing in the stock market. Yet with great risk sometimes comes great reward, and your initial investment could greatly increase in size. If you make a good investment using the right research and a little bit of luck, you could be on your way to a serious chunk of change before you know it.
Share your newfound knowledge with your friends below. It’ll make them do a double-take!