Stock Market Basics
 Understanding the
stock market starts with a basic understanding stocks. A stock represents partial ownership of a company – the smallest share possible.
Company's issues stocks to raise capital and investors who buy stock are actually buying a portion of the company. Ownership, even a small
share, gives investors rights to a say in how the company is run and a
share in the profits (if any). While stocks give owners certain
rights, they do not carry obligation in case the company defaults or
faces a lawsuit. In a worst-case scenario the stock will become
worthless but that is the limit to the investor's liability.
Companies issue stocks to raise capital. They may need a cash
injection to expand or to acquire new properties. Each stock issue is
limited to a certain number of shares, and when they are issued they are
given a par value. The market quickly adjusts that par value according
the perceived health of the company and its potential for growth.
Investors usually buy stocks because they believe the company
will continue to grow and the value of their shares will rise
accordingly. Investors who acquire stock in a new company are
taking more of a risk than buying shares of well-established companies
but the potential gain is much greater. Those who bought Microsoft
shares early in the game (and did not sell them) saw an exponential rise
in their value.
Stock trading is done on stock markets like the New York Stock Exchange (NYSE) or NASDAQ (National Association
of Securities Dealers Automated Quotation System). This means that only
companies listed on a public exchange have shares that can be bought and
sold on the open market. Of course, you could also buy partial ownership
in a smaller company that is not listed on a stock market but that is a very different type of investment than buying stocks.
Because stocks must be bought and sold on a stock market,
an individual investor needs a broker to make transactions for him.
Brokers take orders to buy or sell a certain stock. The order may
include instructions to trade at a certain price or simply what the
market will bear. Once the broker receives the order he attempts to
execute it by finding a buyer or seller as the case may be. The buyer or
seller is also represented by a broker and each broker receives a
commission on the sale.
Advantages of
Stock Ownership
Stocks have several advantages over savings investments. Because
they represent ownership in a company they give the holder rights to
participate in major decisions the company faces. Every share represents
one vote and shareholders are regularly asked to vote on important
matters. Ownership also allows stockholders to benefit from any profits
the company makes. Profits are distributed in the form of dividends, and
may be issued once or twice a year at the discretion of the company
directors.
If the company prospers the value of the stock will rise and
distribution of profits also increases. The downside of this is that if
the company does poorly the value of the stocks may fall.
When compared with savings investments (like bonds or bank certificates
of deposit) stocks have the potential to earn more money -- but they
also carry the risk of loss. Learning about the stock market and the various investment strategies can help to minimize loss, and
most investors find they do much better on the stock market than is possible with any kind of savings investment.
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