If you are one of the ordinary 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 thousands or millions of dollars to spare?” It can be intimidating at first, but once you learn the basics of investing in stocks, the stock market isn’t all that difficult to understand. How does the stock operate? Here are the answers that can get you started on your way toward making some financial decisions that might 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 understand what the stock market does?
First of all, let’s determine exactly what a stock is; 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 restaurant’s reputation falls as a result. 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 all there is to understand 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 each share’s cost is low. Then, when you have chosen wisely, this new company invents a miraculous product or explodes on the scene with 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 religion, so you buy stock in a company that manufactures Bibles; you pay $10 per share and buy ten shares, for a total investment of $100. Then, Bible Printers, Incorporated lands an overseas account and becomes the exclusive Bible supplier for South Africa. They are soon bringing in a huge profit, and since they are, more people want a piece of the pie. So, the cost of the stock goes up to $20 per share. You are ecstatic and decide to sell. You sell your ten 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.
Of course, this is a very simplistic approach to the stock market, yet it is just a small glimpse into what and how the market works. If you want to try your hand at investing some small amounts in one of the S&P 500 companies, try “Slices” from Charles Schwab. “Slices” allows you to invest as little as $5 to purchase fractional shares of the 500 largest companies listed in the United States. To learn more about how this works, visit https://www.schwab.com to open an account.
If you would like to have a deeper look at the markets and how they work, get a copy of my book, “How the Stock Market Operates” from Amazon at http://amzn.to/2Ir33Nk or visit my website where all my books and digital products are available https://www.personalfinancemadesimple.com.
If you have any questions or need help with investing, consult a fee-only Registered Financial Consultant or reach out to me directly. I am based in Nashville, Tennessee but can assist you no matter where you live in the United States.
