How Does The Stock Market Work?

by Martin

Are you ready to start investing money in the stock market? Are you interested in finally figuring out the answer to how does the stock market work? If you answered yes to any of those two questions then you need to keep on reading.

[Quick note: If you're ready to start investing, I urge you to sign up with Betterment. You get $25 for free, a 30 day trial period, and a hands-off money management tool to help you make more money than ever before.]

I find that many young people want to start investing in stocks but they just don’t know where to start. The only information that filters down to us is what some delusional uncle has to say about getting rich quick by catching the next hot stock pick. We never really learn what the stock market and investing in stocks is all about. Stock market investing tips won’t work when you still don’t fully understand what you’re getting yourself into.

Today we’ll take a look at the stock market for all college students/recent graduates that want a basic introduction into how it all works.

To add wise words to this post I’ve added a quote from Warren Buffett at the start of every section. If anyone knows how the stock market works it has to be Mr. Buffett. Let’s get started…

What happens when you buy a stock?

“We believe that according the name ‘investors’ to institutions that trade actively is like calling someone who repeatedly engages in one-night stands a romantic.”

When you decide to buy shares in a company you’re buying a piece of that company. Buying stocks is interchangeable with buying shares.

The price that you see on the bottom of the page on the news channel is what it costs for one share of stock in the company. As you can tell owning one sharing often won’t do you much good.

The value of that share also depends on how many shares that company has issued. This means that low share price isn’t always a sign of a hot buy.

Why would a company sell shares? The reason that a business is willing to sell a piece of its ownership is simply to raise money. The company is raising money for other projects or just so that they don’t have to be fully self-funded.

Why do investors even buy stocks?

“Wall Street is the only place that people ride to in a Rolls Royce to get advice from those who take the subway.”

The simplified version of why investors buy stocks is to make money. The assumption with any investment vehicle should be the intention of making a profit. Obviously this isn’t the proper response for an introduction to stocks articles. Let me explain how this works.

How does the stock market work when it comes to making money? How do you make money off stocks? There are two ways that investors hope to make money from the stocks that they own:

  1. Have the stock price increase and sell at a profit. If you buy a stock at $2.00/share your hoping that it will increase past this mark. Day traders hope that the stock price increases quickly. Long-term investors are willing to wait out the typical market swings.
  2. From dividends. The company pays dividends as a form of profit sharing with share holders. Not all companies do this. You need to find out which companies offer dividends and what the percentage is.

As with every investment you need to be warned that there’s absolutely no guarantee that you’ll make money from either of the options listed above. There’s always the possibility that a market swing can bring the price of a share down or the company can run into some trouble that will cause the price to go down. Anything can happen.

What sort of stocks should you buy?

“Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well.”

It’s often recommended that you buy shares in a company that operates in an industry that you understand. If you don’t know anything about technology then why would you invest in technology? You want to understand what’s going on the field and how it can affect your hard earned cash that you’ve invested into the company.

Before you get into timing the stock market or other complex investment plans it’s recommended that you start off with purchasing shares in companies that you’re familiar with. You don’t want to start chasing the next hot stock pick right from the very beginning.

Where can you buy stocks?

“The most important quality for an investor is temperament, not intellect… You need a temperament that neither derives great pleasure from being with the crowd or against the crowd.”

Times have really changed when it comes to buying shares. You used to have to actually call a stock broker and have that person do all of the work for you. I remember when my dad got into trading stocks back in 1999 he had sit by the phone and keep in touch with the broker. I used to hate this because we had dial up internet at the time and I couldn’t log on to surf Geocities and Angelfire sites!

Now you can buy stocks online very easily. I personally setup a discount brokerage account with my local bank that allows me to trade stocks without leaving my home. If you’re satisfied to finally know how the stock market works and want to get started you can check out the best online stock brokers or in Australia.

Click here to sign up for an account with TradeKing. [Quick update: You get $50 for free for signing up.]

(I can make money off any accounts that you sign up for. You can also make money or lose money from trading stocks. Please do your research so you don’t want to come after me in case you lose your life savings. On the other hand, if you get rich, you know where you can donate!)

How does the stock market work? You should know that by now. Is the stock market risky? Yes, it can be very risky. If you’re not into stocks you can always find alternative investments. At least you know how it works now and you have the ability to decide what you plan on doing with your hard earned money.

After reading this introduction into the stock market you should be ready to get started. Do you have any questions left? Please feel free to join the discussion.

I hope you enjoyed this piece!

I need to tell you how much I love you. Thanks for supporting Studenomics. This site is all about putting more money in your pocket.

Did you enjoy this article and want to take action? Check out how you can start a business right now.

Click here for free email updates or here to subscribe via RSS. Before you leave, drop a quick thought or joke if you know any.

{ 1 comment… read it below or add one }

1 Drew Marcum

Martin, Thanks for the information on the market. Your article summed the stock market up well.

Thanks again,

Drew

Reply

Leave a Comment

Previous post:

Next post:

WordPress Admin