The stock market can seem like a really intimidating place, especially when you are considering putting your money there. However, what most people don’t know is that the stock market is actually based on a handful of easy to grasp ideas. Companies will sell stock, or partial ownership of the company, to investors to raise money. As the value of those companies rise or fall in value, the value of your investment will follow suit.
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What Is the Stock Market?
The stock market is a collection of public companies that sells partial ownership of their companies to investors in order to make money. Issuing these shares helps companies raise money and spread risk out. Instead of looking for investors one by one, companies who qualify and register offer their shares in a stock exchange. These stocks are called Initial Public Offerings (IPO), also known as a company “going public”.
In the secondary market, investors can buy and sell shares on a stock exchange like the Nasdaq and the New York Stock Exchange (NYSE). These stocks can be from companies like commercial banks or they could be individuals. Rather than buying the shares from the issuing company, you buy them from someone who already owns them. Most stock exchanges do their trading from 9:30 am to 4 pm, known as trading hours.
How Stock Prices Move
The price of a stock changes dramatically depending on supply and demand, investor confidence, world events and information about company profits, and more. Since there are only so many shares of a stock on the market at a give time, the price will rise if there are more buyers trying to get it than sellers hawking it. The reverse is also true; if there are more sellers than buyers, sellers will lower their prices to account for that.
With so many things to keep in mind, it hard to tell when a stock will rise. However, be wary of any tips or guarantees of high returns. If you think a stock sounds too good of a deal, then it probably is.
Understanding the Stock Market: How to Invest
If you’re looking to start investing in the stock market, you don’t actually have to go to New York. All you need is a broker to act as your representative. This person that you hire can come with a brokerage account that you open with a large retail broker such as Fidelity, TD Ameritrade or Charles Schwab.
With the constant improvement of the internet, things have gotten a whole lot easier. You don’t have to be extremely rich to start investing but it is important to look for low-fee options. Fees will eat into your profits from your gains and can cost your tens of thousands of dollars over the years that you invest.
What’s on a Stock Ticker?
A stock ticker shows the price and trading volume of various stocks. It updates throughout the day during trading hours, showing “ticks” (changes) in stock prices and trading volume. Not all of the companies whose shares are traded on a given market appear on the ticker.
Stock tickers will list companies by their symbol. Unless you know the symbol of the company you are interested in, you will have to look up what it looks like before you consult a stock ticker. There, you will see the stock symbol, the number of shares trading and the price it costs to invest in the stock. Also, you will see if the price of stock is increasing by the presence of a upwards green arrow or if it is decreasing by the presence of a downwards red arrow.
If you’re an average retail investor, you don’t need to spend your day glued to the stock ticker. It’s probably information overload. But now you’ll know what you’re looking at next time you’re watching television and see a stock ticker moving across the bottom of the screen.
Stockholder’s Equity
You’re probably wondering why you should even invest in stocks when you can just store physical cash away or put it into a CD or savings account. Over time, the stock market generally will provide a higher return. On average, the stock market will go up around 8% per year, while even the highest-yield savings account will only go up by 2%.
The only downside is that stocks do come with some risk. If the stocks you own become less valuable, your net worth will go down. If this happens, you will need to decide whether you want to sell or ride out the storm and wait for it to come back up. If you are the type that will invest for a long period of time, then experts will probably recommend that you wait it out. If you panic and try to sell while it is low, or buy when the price is high, then you will out on a lot of opportunities to increase your net worth.
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Bottom Line
If you are looking to grow your retirement savings, then consider investing in the stock market. Naturally, if you are younger then you can afford to put more money into your investments. As you do approach retirement, you are more vulnerable to the volatility of the stock market. For more posts like this, check out our full list of bank guides and stock brokers.
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