How Does The Stock Market Work?

How does the stock market work? Are you ready to start investing money in the stock market? 

We all know what it’s like to be stressed out about money. We try to look into the stock market and it makes us feel anxious. There are so many charts and graphs. Where do we begin with the stock market?

I’m here to help you make sense of the stock market so that you’re not confused about it.

How does the stock market work?

I find that many young people want to start investing in stocks but they just don’t know where to start. The only information that filters down to us is what some delusional uncle has to say about getting rich quick by catching the next hot stock pick.

We never really learn what the stock market is or what investing in stocks is all about. Stock market investing tips won’t work when you still don’t fully understand what you’re getting yourself into.

Today we’ll take a look at the stock market for all college students/recent graduates that want a basic introduction into how it all works.

To add wise words to this post I’ve added a quote from Warren Buffett at the start of every section. If anyone knows how the stock market works it has to be Mr. Buffett. Let’s get started…

What happens when you buy a stock on the stock market?

“We believe that according the name ‘investors’ to institutions that trade actively is like calling someone who repeatedly engages in one-night stands a romantic.”

When you decide to buy shares in a company you’re buying a piece of that company. Buying stocks is interchangeable with buying shares.

The price that you see on the bottom of the page on the news channel is what it costs for one share of stock in the company.

As you can tell owning one sharing often won’t do you much good. The trick is to own multiple shares. The more shares that you have, the more money that you could potentially earn or lose.

The value of that share also depends on how many shares that company has issued. This means that low share price isn’t always a sign of a hot buy.

Why would a company sell shares?

The reason that a business is willing to sell a piece of its ownership is simply to raise money. The company is raising money for other projects or just so that they don’t have to be fully self-funded.

Not all companies go public. Some companies stay private because they either don’t want to disclose information to the public or they don’t need money from investors.

Why do investors even buy stocks?

“Wall Street is the only place that people ride to in a Rolls Royce to get advice from those who take the subway.”

The simplified version of why investors buy stocks is to make money. The assumption with any investment vehicle should be the intention of making a profit. Obviously this isn’t the proper response for an introduction to stocks articles. Let me explain how this works.

How does the stock market work when it comes to making money? How do you make money off stocks?

There are two ways that investors hope to make money from the stocks that they own:

  1. Have the stock price increase and sell at a profit. If you buy a stock at $2.00/share, you’re hoping that it will increase past this mark. Day traders hope that the stock price increases quickly. Long-term investors are willing to wait out the typical market swings.
  2. From dividends. The company pays dividends as a form of profit-sharing with share holders. Not all companies do this. You need to find out which companies offer dividends and what the percentage is. If you’re a long term investor, you’re going to love dividends because you’re getting paid.

As with every investment you need to be warned that there’s absolutely no guarantee that you’ll make money from either of the options listed above. There’s always the possibility that a market swing can bring the price of a share down or the company can run into some trouble that will cause the price to go down. Anything can happen.

Day traders buy stocks in the hopes that news will bring the price up that same day. They’re hoping to turn a profit quickly.

Forbes summarized day traders best in this article:

“If you are an amateur, you may be playing with fire.  Your odds of success are like those of any other high stakes gambler.  The professionals really know their stuff.  Typically, they are well-established, disciplined traders who are experts in the markets.  The other characteristic is that they invest large sums of money, which they can afford to lose.”

Can you handle the swings? Do you have the time for this?

What sort of stocks should you buy?

“Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well.”

It’s often recommended that you buy shares in a company that operates in an industry that you understand.

If you don’t know anything about technology then why would you invest in technology?

You want to understand what’s going on the field and how it can affect your hard-earned cash that you’ve invested into the company.

Before you get into timing the stock market or other complex investment plans it’s recommended that you start off with purchasing shares in companies that you’re familiar with.

You don’t want to start chasing the next hot stock pick right from the very beginning. You want to know the business of the company that you’re putting your hard-earned money into. You wouldn’t loan money to a friend who was running some confusing business model, would you?

Where can you buy stocks?

“The most important quality for an investor is temperament, not intellect… You need a temperament that neither derives great pleasure from being with the crowd or against the crowd.”

Times have really changed when it comes to buying shares. You used to have to actually call a stock broker and have that person do all of the work for you.

I remember when my dad got into trading stocks back in 1999 he had to sit by the phone and keep in touch with the broker. I used to hate this because we had dial-up internet at the time and I couldn’t log on to surf Geocities and Angelfire sites!

Now you can buy stocks online very easily. I personally setup a discount brokerage account with my local bank that allows me to trade stocks without leaving my home. You can take the time to search for the best stock brokers online. I personally use Questrade now because they make the entire process so simple.

How does the stock market work?

You should know that by now. This article and the links in here are more than enough for you to get started. I would start by putting aside $500 -1,000 to invest in the stock market. You don’t want to go all in right off the bat.

Is the stock market risky?

Yes, it can be very risky. It can also be safe too if you invest in secure companies that have a solid history or if you look for companies that pay dividends.

If you’re not into stocks you can always find alternative investments. At least you know how it works now and you have the ability to decide what you plan on doing with your hard-earned money.

I would take the time to study stocks for a few weeks before you make any moves.

You’re ready to get started with the stock market! Do you have any questions left? 

1 thought on “How Does The Stock Market Work?”

  1. Martin, Thanks for the information on the market. Your article summed the stock market up well.

    Thanks again,

    Drew

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