Today, we’re breaking down the stock market – for beginners. The stock market is one of the most over-complicated concepts, and so many people treat it like an impossibly hard to understand subject. But it’s really not. We’re here to show you that today. So let’s start from the beginning.
What is a Stock?
Imagine a small business.
Usually, when we think of businesses, we think of them having one owner or maybe a small group of owners.
These owners have what is called equity, or an equity stake in the company. Equity just means that the owners have ownership over a certain portion of their business, and that ownership has a value in dollars.
Now, how does this help us understand what a stock is?
Well, a stock is simply a small piece of equity.
When a company decides to issue shares of stock, they are saying “we are willing to give up some ownership (or equity) of our company, in exchange for invested cash”. Companies make this decision because the more equity they sell, the more opportunity there is to gain investment, meaning the more cash the company has at their disposal!
This investment money allows them to innovate, hire more people, do more research and development, and ultimately make better products and services.
This process of issuing shares of stock for the first time is called “going public”, which happens at an initial public offering (IPO). It’s a complicated process that has a lot of legal and regulatory steps, but when a company goes public, it means any investor, like you or me, can buy a piece of equity in that public company through purchasing shares of their stock.
What is the Stock Market?
Once we understand this idea of what a stock is, it’s pretty easy to understand the idea of a stock market. Imagine a flea market or a farmers market. A place full of buyers and sellers, with lots of trades taking place.
The stock market is like this, except that the vast vast majority of the buyers and sellers are making these trades through the internet. Buyers in this virtual market are looking to trade their cash for shares of stock, and sellers are looking to get rid of their shares of stock in exchange for some cold, hard cash.
How Can You Buy Stocks?
Stock brokers act as intermediaries between buyers and sellers of stocks. They execute buy and sell orders on behalf of their clients and usually take small fees off the top.
Over the past few years, however, there has been a movement (led by Robinhood) in the brokerage world toward commission-free trading. Regular people like you and me can download a brokerage app on our phones, transfer some money into our brokerage accounts, and trade with zero commission fees!
Some of our favorite commission-free brokerages are Robinhood, Charles Schwab, and E*TRADE. Bonus tip: if you’re looking to start investing but don’t know where to start, consider signing up for a robo-advisor.
When you use a robo-advisor as your brokerage, all you have to do is tell it a little bit about your goals and your risk tolerance, and it will create a portfolio (usually made up of ETFs) for you! Robo-advisors charge a small (around 0.25%) annual management fee.
Some of our favorite robo-advisors are Betterment and Wealthfront.
To get some more information on stock brokers, check out our list of the Best Stock Brokers for Beginners!
Want a FREE STOCK when you sign up for a brokerage account? Use this link to create a Robinhood account and get a free stock as soon as you sign up! Plus, when you refer a friend, you’ll both get a free stock!!
Why Do You Want to Buy Stocks?
Stocks are an investment, meaning that you sacrifice control of some of your money now in hopes of controlling more money later.
While the idea of giving up some of your hard-earned cash may seem daunting, it will all be worth it at the end of your investing journey.
If you can spare enough of your income to invest a few hundred dollars a month, you’ll end up with hundreds of thousands (or even millions) of dollars by the time you retire!
What Type of Investments Should You Buy?
The stock market offers lots of different types of investments, and several of them are perfect for beginner investors.
Let’s start with the basic investment security: single stocks. As mentioned previously, buying a share of stock (or equity) in a company means that you are a partial owner of that company.
You might buy a share of a company because you think the stock price is going to increase, or because you want to earn constant income through dividends.
The general rule regarding stock investing is “buy low, sell high”. This may seem obvious, but what’s not so obvious is actually choosing which stocks you think will rise in price in the future.
For more help on this topic, check out our article on How to Pick Stocks!
While we’re discussing individual stocks, it’s important to note one of the most important security measures that investors take to safeguard their portfolios against company- and sector-specific risk: diversification.
Diversification is the practice of including a wide range of investments in your portfolio. Theoretically speaking, proper diversification lowers the amount of risk in a portfolio and provides higher average returns than you would get from any one stock alone.
If you’re going to build yourself a diversified portfolio, you’ll need a way to research stocks. Seeking Alpha is a stock screening and investment research platform that we recommend to help you find the perfect stocks for your portfolio. You can sign up for a FREE two-week trial of Seeking Alpha here or read our Seeking Alpha review here.
If you’re wondering which app you should download to help you get into the stock market, read our list of the Best Investing Apps of 2022!
Exchange Traded Funds
Another type of investment that’s great for beginners is called an Exchange-Traded Fund, or ETF.
ETFs are similar to mutual funds in that they are a collection of stocks that you can invest in without having to purchase each individual stock in the fund. They differ from mutual funds, however, in that they are much more accessible to everyday investors like you and me who don’t have tens of thousands of dollars laying around to invest.
You can buy and sell ETFs right from your brokerage account during trading hours just like regular stocks (hence the term “exhange-traded”), and they often cost much less than you would pay if you were to buy each individual stock!
ETFs are a great way to add some diversification into your portfolio without breaking the bank. One of the most common ETFs is SPY, a fund that tracks the entire S&P 500 as a whole. That’s right, you can gain exposure to every stock in the S&P 500 for just a few hundred dollars!
Now that we’ve gone through a broad overview of the stock market, it’s time to dig deeper into some of the topics in this article that interest you.
Are you intrigued by the idea of ETFs? Dividends? Robo-advisors? Wherever your interests may lie, Wall Street Survivor has plenty of articles and YouTube videos to satisfy your curiosity. So, what are you waiting for? Head back to the home page and learn, learn, learn!
FIRST STEPS TO FINANCIAL SUCCESS:
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