This post may contain affiliate links. That means if you click and buy, I may receive a small commission. Please read my full disclosure policy for details.
As we get older, the thought of investing our extra money instead of spending it on frivolous things becomes more appealing. When it comes to investing, most people think of the stock market but not all of us know what that entails.
What is the stock market? How does it work? Where does my money go? How does it help me get more money? There are so many weird terms… Where do I even start if I want to get into the stock market?
Let’s answer some of these questions for you so that you can be informed before making any decisions.
#1) What Is The Stock Market?
The stock market is the blanket term used for the act of selling and buying stocks and bonds. It’s not an actual “place” like Wall Street in New York though some people use those two phrases interchangeably.
#2) How Does It Work?
Founders and owners sell units of ownership to their companies so that they can better improve themselves by doing things like researching the market that they are in, creating new and improving old products and services, expanding and modernizing their buildings, and even hiring new employees and team members.
Once you invest in their company by buying some of their stock, you become a shareholder. If that company’s profits go up, so does the value of the share that you own. If the company’s profits go down… Well, you get the picture.
While we’re on that topic, you have to remember that a company’s stock values go up and down every single day. If you wake up in the morning and the value of your stock is lower than when you bought it yesterday, just five minutes. It’ll probably change five more times throughout the day.
#3) Where Does My Money Go?
When you buy a share of stock, that means that you now have a share in company. That means that you’re entitles to a small asset or a piece of the earnings from that company. Why would a company sell its assets and earnings? Because that company needs the money. This is how they can raise the money to expand their business. For the company, this is called equity financing.
Since the founders and owners aren’t putting all of their income back into the company, if the company fails, they won’t lose absolutely everything. Of course, this also means that if the company fails, it loses chunks of “other people’s money.”
#4) How Does This Help Me Get More Money?
You make money when the company that you’ve invested in makes more money. That’s one of the reasons why people are always talking about spreading your money out and investing in different companies. Investing all of your eggs in one basket is dangerous because if someone drops that basket, all of your eggs will splatter on the ground.
Now, if you have four different baskets and someone drops one, you still have the other three baskets to fall back on. You still have eggs. People can still put more eggs in those baskets before the end of the day. Get it?
#5) What Is It That I’m Looking At?
When we turn on the news and they start talking about stocks, you’ll hear them drop a whole bunch of buzz words that you might not know. Let’s take a quick peek at some of that vocab so you won’t be so confused when you’re watching the stock market updates:
Dow Jones Industrial Average: this is the average of the value of 30 of the largest American stocks. They give you this number so that you can get a general idea of how those types of companies are doing on that particular day.
S&P 500: This is the average of 500 of these large American companies.
NASDAQ Composite Index: the NASDAQ, however, covers about 2,800 global (and domestic) companies
When you look at these numbers, you can see how the market is doing as a whole. If the economy is doing great, it’ll rise (that’s what they call a “bull market“) but if the economy is doing poorly, those numbers will fall (that’s what they call a “bear market“).
You can find stocks on stock exchanges. What are exchanges? There are three big stock exchanges in the United States:
- which stands for the New York Stock Exchange
AMEX which stands for the American Stock Exchange
NASDAQ which stands for the National Association of Securities Dealers
#7) How Do I Get Started?
There are a lot of companies (domestic and foreign exchanges) that are qualified and certified to buy and sell stocks. You can look into an “investment house” which will send you to a stockbroker that can make your trades for a fee. The biggest investment houses that you can talk to are:
Lately, there has been a number of online trading companies that give YOU the power to trade stocks and their fees are much lower. If you’re looking to go this route, check out eTrade.
The stock market can be a scary and intimidating concept. The best thing to arm yourself with before and during your stock market adventures is knowledge. If you’re going to invest in a company, watch them. Keep an eye of what is going on in their business and the latest trends in the market that they are in. Remember that the stock market is susceptible to bad news so keep an eye on it.