Let’s say you’re at a party and you’re talking with several friends. The conversation slowly drifts towards that strange subject of investing. At first, you were an active participant in this chat, but now you’re lost in an onslaught of jargon. Words like multiples, splits, dividends, highs, market caps and limits are coming at you like bullets and you have no way of understanding what all this is.
Indeed, investing is more than the topic at parties and the short blurb at the end of the news. It’s actually a common activity all people should practice. Quite simply, investing is putting your money is safe hands so that it will not only be there thirty years from now, but hopefully increase in size.
At some point in your life, it becomes necessary to do more with your money than to spend it or cache it under a mattress. Eventually, once stability has been reached in your life and long-term goals become clear, investing becomes a logical thing to do. Since hurdles like the purchase of a house, college, weddings and retirement will require substantial amounts of money, it’s best to put this money in a safe place where it can grow.
Now that it’s obvious that investing is a decent idea, the real question is how to go about it. One simple way to throw the money in the bank, collect the modest 6% interest each year, and forget about it. However, most people want something more dynamic and promising. This is where stocks enter the game.
A simple question one might have is ‘what are stocks?’ Yes, people mention them all the time, but few people know exactly what stock is. Quite simply, a share of a stock is a portion of the company. Therefore, if you own a share of stock, you actually own a small portion of a company. So, when the company increases in value, your small piece of the business increases in value too. However, any failures the company has will be reflected in the value of your shares too.
Since the concept of owning stock is simple enough, now we are brought to the more difficult side: buying stock for profit. This is where investing a little more complicated, such are peoples’ perceptions that some are scared off from any and all investing. Admittedly, there are many aspects of the stock market and its countless nuances. However, there is a definite way to succeed, and it just requires a rudimentary lecture on the field. This is what we have outlined here.
Now that we’re familiar with what stock is, the question is knowing how to buy it. Buying shares of a company is quite unlike buying, say, bread and milk at a supermarket. In a supermarket, you find the items you want, take them to a register, pay, and leave. Shares are not sold in any format like this. Instead, the process is much more complex.
With minor exception, shares of stock are sold at markets and exchanges. The biggest and most famous of these is the New York Stock Exchange, where hundreds of companies are traded on a daily basis. Specialists on the floor of this huge room manage the buying and selling of shares, as the price and supply could fluctuate very quickly. By contrast, the price of milk stays the same for days on end and supply tends to be replenished regularly. With stocks, the supply and demand could be (and often are) very lopsided, which brings about a rapid change in price.
You may be wondering if you can just walk into the exchange, pull out your wallet, and walk out with a basket of stocks. This is not the case either, as the trading of stocks is limited to those who hold ”seats” on the exchange. The term is somewhat old in that no one ever sits at an exchange like the NYSE. Rather, holding a set is owning the right to trade stocks at the exchange itself. There are a limited number of seats and when they change hands, a price of several million is usually commanded.
‘If only a set number of people can trade stocks,’ you might ask, ‘then how do I buy any?’ Of course, there is a way for a layman such as you or I to buy stocks. The key is to use a broker, a company that has access to the market by holding seats. For a commission, brokers will buy or sell shares on your behalf.