How the stock market works
A simple guide for new investors (or anyone who needs a refresher).
So, you’ve heard that investing can be a great way to grow your savings…but everything you find on the subject literally sounds like it’s been written in a different language. So many abbreviations! And what does it even mean to invest in a stock?
Stock Talk
At a basic level, when you purchase stock in a company you are exchanging your money for a piece of that company. Why would you do this? Because owning a piece of a company gives you an opportunity to benefit from that company’s success (we’ll explain in a sec, don’t worry). Meanwhile, companies sell stocks to raise money that they can use to run their business.
The amount of stock you own is measured in shares. A company will only issue so many shares at a time, so the number of shares you own, compared to the total number of company shares owned by anyone, will tell you how big your piece of the company is. For example, if you own three out of 500 shares, that’s 0.6% of the company.
Still with us? Ok, good.
So, remember when we mentioned benefitting from a company’s success? There are a few different ways to do that – and generally, the larger your piece of the company, the more you’ll benefit. Two main ways investors make money are:
- Dividend payments. Some companies pay out dividends to their shareholders (people who own shares in the company). This means that you could get regular payments – usually four times a year – just for owning stock. The money for these payments typically comes from a company’s profits, and the amount will vary from company to company. Also, not every company chooses to pay dividends – it’s usually the big, established companies that make this move.
- Selling your shares for a profit! Stock prices can go up and down on the stock market (we’ll get into why prices change in just a moment). You might buy $100 worth of stock in Company A and then sell it five years later for $1,000 – resulting in a profit.
Think about it like this: you find a cool oil painting at a thrift store and buy it for $5. Five years later, it turns out the painting was created by a famous artist and is now worth $5,000. In this example, the market value of your property has changed, and if you were to sell it, you would make money.
That’s essentially what happens when you sell stock and make a profit. Of course, sometimes stock prices can go down, and you may end up with a loss when you sell – getting less for the stock than what you originally paid for it.
Read the full article.