Have you ever thought about how the rich get wealthy and keep the money coming? Do you dream of retiring early? Or being able to retire at all? You know that you should invest, but not sure where to start? If you have answered yes to any of the above questions then you have come to the right place.
On this website, you can find anything and everything regards the stock market for beginners. Although the stock market might seem to be pretty confusing at first, once you master the major financial concepts it all will become much more clear.
Before you even start reading more about investing you should clearly realize that investing is not one of those get-rich-quick schemes. Regardless, of your interests and occupation, this website will help you understand what investing truly is.
One last thing, remember: “Every time history repeats itself, the price goes up.” – Ronald Wright
The Stock Market Basics, Introduction:
1. What are Stocks?
In simple words, a stock is your claim against a company’s assets and earnings. The more stocks, shares, equity (it’s all the same) you have or acquire the more claim against assets and profits you have.
A stock certificate is actually a legal document, which is used to prove your ownership of a publicly traded corporation. Since most of the stock-related transactions are done electronically, stock certificates are not often issued.
The main reason why stocks exist is that company wants and needs to raise money in order to survive or expand its current operations. Well, there are actually two main ways to do that, which are equity and debt financing. Equity financing involves the company’s action of selling its stock to the public in order to raise money. On the other hand, debt financing allows the company to get extra money by borrowing it from third parties, such as a bank or any other type of financial institution.
In conclusion, it’s important to understand the stock market well before you do any serious investment decisions.
2. Different Types of Stocks
In the stock market world, two types of stocks exist – preferred and common stock.
Since preferred stocks have more rights and privileges let’s start with them. First of all, dividends are paid off to preferred shareholders first and only then to common stockholders. In case of liquidation, preferred stock owners get the money first as well. On the other hand, preferred stocks don’t have any voting rights.
The most popular type of stock is common stock. As a matter of fact, most of the company’s stocks can be classified as common stocks. Common stockholders get one vote per share in the time of important decisions. It’s important to realize that common stock shareholders are on the bottom of the priority ladder. This means that in case of liquidation, common stockholders get their claims last.
There a ton of benefits of stock investing, which are going to be discussed in this article. Although investing in stocks has a lot of advantages it also has a number of disadvantages.
The main disadvantage of investing in stocks is the risk. Since the stock market changes daily, you need to assume risks and make informed and calculated decisions. Remember, it’s very important to fully understand the market completely before making any decisions.
3. Stock Investing Benefits:
Good, High returns: it’s interesting that over time stocks tend to significantly outperform bonds, CD rates, mutual funds, and real estate investments.
Taxes: did you know that stocks are taxed at a much lower rate than any other type of investment?
Good Diversification: it’s easy to diversify your stock investment so the risk of losing everything decreases. On the other hand, just imagine how hard it would be to diversify your real estate investments.
4. Market Capitalization
Market capitalization is the total dollar value of all outstanding shares of one company. Market capitalization can be easily calculated by multiplying the total number of shares by the stock price.
This principle comes quite handy when the size of a certain company needs to be determined. It’s that simple: the bigger the company, the larger its market capitalization is and the more importantly the safer investments tend to be.
In conclusion, stocks can be classified by their market capitalization value. Successful investors use the following chart to determine the general value of returns on investments.
Buying, Selling, and Everything About Trading:
1. How Stocks are Traded
Most of the stocks are traded on the stock market exchanges. Some exchanges are physical, where transactions occur on a trading floor. While other exchanges are a network of computers, where stocks are traded electronically.
A stock market is simply a supermarket for stock buyers and sellers. There are two types of market exchanges – primary and secondary. The primary market is where stocks are being born and are issued to initial public offerings. The secondary market is where people trade previously issued stocks. When people talk about the market exchange, they have a secondary market in their minds.
The most popular and well-known stock market exchange is the National Stock Exchange. Most of the transactions are done online through Registered Stock Brokers.
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2. Buying on Margin and Selling Short
Whenever you don’t have enough money to purchase the desired stock, there are two ways to acquire that stock, which are buying on margin and selling short.
Buying on margin is the process of borrowing the funds from your broker to purchase stocks. In other words, it’s a simple loan from your broker. The main reason behind buying a stock on margin is a belief that the current stock price is underestimated and will go up in the near future. So you buy low and sell high.
Selling short is a way to sell stocks that you don’t really have at a high price and buy them back when the price decreases. So if you think that the current stock price is overvalued, you can borrow the stock from a broker. Wait till the price decreases, buy the stock at a lower price and return it back.
3. What Causes Stock Prices to Change?
Stock prices change almost hourly due to market forces. In other words, share prices change daily due to supply and demand. If more people want to buy a stock – demand, than to sell it – supply, the stock price will rise. Conversely, if more people want to sell a stock than to buy it, then the price will decrease.
Understanding supply and demand is quite simple. The problem comes with understanding what makes some people to like one stock and dislike the other. It all comes down to what news is positive for the company and which are just negative publicity.
Generally talking, the main idea behind the stock price changes is what investors feel the company is currently worth. Don’t get it missed up with market capitalization. They are two totally different factors.
The most important factor that affects the Company’s net worth is its earnings. In short, if the company surprises its investors with the earnings then the price would go up, but if it will disappoint then the price will go down.
4. Questions to Ask Before Buying a Stock
If you are like most of the other people, you have either thought about investing in stocks or you actually own some stock. If that’s true, then great because there is a lot of money to be made there. But the important question is how actually do you pick a good stock to buy?
Here is a collection of questions to ask yourself before buying a stock:
What does the company do? Although it seems like a pretty basic question, it’s important to consider it since it helps to realize what industry the company is in and to determine its profitability.
How fast is the company growing? over a long period of time, the stock potential is generally driven by the company’s growth. If revenues are increasing, that’s a good sign that something is working and thus there is a potential to make good money.
How profitable is it? in addition to growth, you should also consider how effectively the company makes money. A return on assets is a pretty good indicator of that. The higher the ratio the more profitable the investment tends to be in the long run.
Is it worth the price? to figure out that trying to look at the price-to-book ratio. Which shows how many shareholders are paying Rupee 1 for the company’s assets.
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