If you are one of the average people out there in the United States who has only a little bit of money to invest, you may often say to yourself, “How does the stock market work? Can I invest if I don’t have millions of dollars to spare?” It can be intimidating at first, but once you learn the basics of investing in stocks, the stock market really isn’t all that difficult to understand. How does the stock market work? Here are the answers that can get you started on your way toward making some financial decisions that might just keep you in the black now and for years to come.
The basic premise of the stock market is to buy low and sell high. Maybe you have heard that before, but are you wondering just what you are buying and selling? Are you wondering how on earth you know what is considered low and what is considered high? Do you really understand what the stock market does?
First of all, let’s determine exactly what a stock is; a stock is a little piece of a company, often called a share. If you own a share of stock in Restaurant X, you own a tiny portion of Restaurant X, along with all the other shareholders, or stockholders, in that company. If you have bought your share(s) in a good company, Restaurant X will make a profit. If it does, the value of your stock increases because the restaurant is now worth more than it was before it made a profit. If something happens to cause Restaurant X to fumble a bit – let’s say the chef decides to leave the country with his fiancée – and the reputation of the restaurant falls as a result, and profits cease, you now own a tiny portion of a company that is not doing well. Therefore, the value of your stock decreases because the net worth of the company itself is declining.
That is really all there is to understanding the absolute basics of the stock market. The trick, of course, is to know how to choose the right companies to invest in and when to buy the shares and when to sell them. Ideally, of course, you will buy when a company is relatively new and the cost of each share is low as well. Then, when you have chosen wisely, this new company invents a miraculous product or explodes on the scene with a terrific service and makes a profit. Then, right before the company loses momentum, you sell and make a profit from your shares.
For example, you believe the recession will cause people to turn to a product or service “XYZ” , so you buy stock in a company that manufactures “XYZ”; you pay $10 per share and buy 10 shares, for a total investment of $100. Then, “XYZ” incorporated, lands an overseas account and becomes the exclusive XYZ supplier for a country/region, etc… They are soon bringing in a profits, and since they are, more people want apiece of the pie. So, the cost of the stock goes up to $20 per share. You are pleases and decide to sell. You sell your 10 shares for $20 each, for a total income of $200. You have doubled your money. That’s how the stock market works on a good day.
But do you research on the management of the company, its competitors, etc… The above is just a glimpse of the mechanics of how part of this works. This information is only intended to provide incrementally extra knowledge. At the essence, it is still buy and sell basics.