A stock is an ownership share in a corporation. Each of these shares denotes a part ownership for a shareowner, stockholder, or shareholder, of that company.
Stocks are traded on exchanges all over the world, the largest is the New York Stock Exchange or NYSE.
Stocks are identified by their ticker symbol. Investors can buy a share in companies, or a share of a diversified global portfolio of stocks. Individual Investors can purchase shares for themselves, at a brokerage of their choice, or direct from the company, wherever they have an account set up.
There are different types of shares, common, preferred and unlisted. The goal is for capital appreciation, as well as income from interest, and dividends, so the investor can have a profit that beats monies in Treasury bills or beats inflation. Over time, stocks have outperformed cash and bonds; this takes into account depressions, world wars, and other world changing events. Stocks automatically adjust for the inflation of the currencies.
Stocks are traded on exchanges, which are places where buyers and sellers meet and decide on a price. Some exchanges are physical locations where transactions are carried out on a trading floor. The purpose of a stock market is to facilitate the exchange of securities between buyers and sellers, reducing the risks of investing. Stocks prices change every day as a result of market forces.
By this we mean that share prices change because of supply and demand. If more people want to buy a particular type of stocks (demand) than sell
them (supply), then the price moves up. Conversely, if more people wanted to sell another type of stocks than buy them, there would be greater supply than demand, and the price would fall.
Understanding supply and demand is easy. What is difficult to comprehend is what makes people like a particular type of stocks and dislike another. This comes down to figuring out what news is positive for a company and what news is negative. There are many answers to this problem and just about any investor you ask has their own ideas and strategies.
That being said, the principal theory is that the price movement of a stock indicates what investors feel a company is worth.
The most important factor that affects the value of a company is its earnings. Earnings are the profit a company makes, and in the long run no company can survive without them. It makes sense when you think about it.
If a company never makes money, it isn’t going to stay in business. Public companies are required to report their earnings four times a year (once each quarter). The reason behind this is that analysts base their future value of a company on their earnings projection. If a company’s results surprise (are better than expected), the price jumps up. If a company’s results disappoint (are worse than expected), then the price will fall.
So, why do stock prices change? The best answer is that nobody really knows for sure. Some believe that it isn’t possible to predict how stock prices will change, while others think that by drawing charts and looking at past price movements, you can determine when to buy and sell. The only thing we do know is that stocks are volatile and can change in price extremely rapidly.
You’ve now learned what a stock is and a little bit about the principles behind the stock market, but how do you actually go about buying stocks? There are two main ways to purchase stocks:
1. Using a Brokerage
The most common method to buy stocks is to use a brokerage. Brokerages come in two different flavors. Full-service brokerages offer you (supposedly) expert advice and can manage your account; they also charge a lot. Discount brokerages offer little in the way of personal attention but are much cheaper.
At one time, only the wealthy could afford a broker since only the expensive, full-service brokers were available. With the internet came the explosion of online discount brokers. Thanks to them nearly anybody can now afford to invest in the market.
2. DRIPs & DIPs
Dividend reinvestment plans (DRIPs) and direct investment plans (DIPs) are plans by which individual companies, for a minimal cost, allow shareholders to purchase stocks directly from the company. Drips are a great way to invest small amounts of money at regular intervals.