Hey everyone! I thought it would be interesting and fun to start a series on stock market/investing basics for people that are just starting out. I know firsthand how scary everything can seem and it’s very easy to get overwhelmed with so much information. So, I just wanted to break down the basics into an easy to understand series.
Own A Business And Build Long-Term Wealth
Have you ever wondered what it would be like to own part of a business? Well, when you own stocks you technically own a very small part of a company.
Over the past few decades, Americans have been more and more interested in owning stocks. Part of the reason is because trading costs have come down significantly. You can execute most online trades for less than $8 these days.
Another factor is that large companies are no longer offering pension plans and instead pushing the burden of preparing for retirement on employees through 401k programs.
Without a doubt, the stock market has been one of the greatest creators of wealth in history. Just ask Warren Buffett who’s sitting at a pretty $70+ billion from just investing! Stocks are a crucial part of every investment portfolio no matter if you’re in retirement or still building wealth.
Despite the popularity, a lot of people don’t take the time to understand how the stock market operates before jumping in. I was a little scared myself when I first started investing, but with lots of reading, practice, and perseverance, I’ve learned a lot.
What Are Stocks?
Shares also give shareholders certain rights to vote on company matters including electing the board of directors who oversee the management team.
It’s important to distinguish ownership of stock in a private versus a public company.
A private company just means its shares are not quoted daily and traded on a public stock exchange. The only way to buy or sell shares is through negotiated transactions.
In contrast, public companies have shares hare are freely traded on the market through stock exchanges such as the New York Stock Exchange (NYSE) or NASDAQ. In addition, public companies must file periodic financial reports to its shareholders.
Shares of public companies are traded over major stock exchanges. The two biggest ones in the US are the New York Stock Exchange and the NASDAQ. Normal trading hours (when you can buy or sell shares) is between 9:30 AM to 4:00 PM Eastern Standard Time.
Stock exchanges connect buyers and sellers to facilitate trading. Back in the day, trading used to occur mostly on trading floors where brokers would scream at each other to make trades.
These days, most trading is done online and is much more convenient for us small investors.
How To Make Money With Stocks
There are two ways you can make money with stocks: stock price appreciation and dividends.
Stock price appreciation just means the selling the stock at a higher price than you paid.
Dividends are distributions of the Company’s earnings to shareholders.
They are entirely voluntary and companies typically like to pay them on a recurring basis (i.e. monthly, quarterly, or annually)…although dividends can be one time in nature too.
In fact, back in 2013 many companies paid out a “special one-time” dividend because of fears of a higher dividend tax.
As I mentioned before, all public companies have freely tradable shares on exchanges. Stock exchanges identify a company’s shares through a ticker symbol. Each company will have a unique ticker symbol.
Don’t worry, many companies will have very easy to remember ticker symbols–so people can easily remember and trade them. Let’s see if you can identify any of them:
Alright, can you guess which companies have the above ticker symbols?
The answers are Apple (AAPL), Costco (COST), Microsoft (MSFT), and Google (GOOG).
If you don’t know a company’s ticker symbol, just head on over to Google Finance and type in the name of the Company. Google will automatically pull up the ticker symbol on the side.
Shares of public companies are quoted every second and constantly change during trading hours. If you ever wanted to know what a company’s stock price is trading for, just go to any financial website.
My go to one is Google Finance because the interface is very slick and clean (unlike Yahoo Finance), and it provides me with all the information I need.
The key thing to understand is that stock prices change every single day, every single minute, and every single second. It changes based on the selling and buying patterns of all market participants.
Now, there are a lot of studies that show why stock market prices change over the short term (like say a day). However, there is rarely any reason why a stock changes from $11.00 to $11.01 and then falls to $10.99.
Don’t look at stock price changes on a daily basis or even stare at your brokerage account every day. You’ll drive yourself crazy.
Typically, unless there is big news (like say the CEO leaving, or a big lawsuit, or a large product recall), there is no reason for a short-term stock movement. It’s just noise.
However, the thing that drives long-term stock movement (over the course of years) is revenue/sales and earnings/profit performance.
Learning how to invest can be a scary thought. The stock market is filled with fancy “Wall Street” terminology that sound like made up words. However, the earlier you learn the better because this is a life long skill to build wealth. Stay tuned for the next update!
Readers, what do you think about the Stock Market Basics series? Should I keep going? Any ideas on some potential topics you want me to discuss? Let me know in the comments!