Thinking of making a new investment? The stock market is like a maze of sorts and you’ve got to be careful before making your investments because the losses can be substantial. To become a smart investor, you need to be clear with the basics of the stock market. So, we have compiled a list of 10 basic things you need to know about the stock market before you jump right in.
1.What is a stock?
The simplest explanation of a stock would be a share in the ownership of a company. When you buy a stock, you are basically buying a claim on the company’s assets and revenue. The more the number of stocks you buy greater is your ownership claim in the company. Other words commonly used for stocks are share and equity. As a stock owner you have limited liability this means that you aren’t responsible for the company’s failure to pay off their loans.
2.The difference between debt and equity
You might’ve wondered why the company founders give out shares of their company and profits? Why not just keep it all for themselves rather than share it with tons of random people? The truth is all companies at some point need to raise funds, this can be done by taking money from someone else or selling parts of their company. This is known as issuing a stock. A company can take money from a bank or issue bonds. This comes under debt financing. Whereas issuing a stock comes under equity financing. All you as a shareholder get in return for buying a stock is the hope that the value of the share will increase to a rate than what you bought it at.
3.What is a Common Stock?
Common stocks are the most common types of stocks there are (ironic, right?). Most of the stocks bought are the common stocks. They ensure you a claim over the profits of the company, the profits received vary and are never constant. Additionally, you get a vote to elect the members on the board of management.
4.What is a Preferred Stock?
When you buy this stock, you get a share in the ownership but no definite voting rights. This type of stock ensures you a fixed amount of income if you own the stock. Also, the company can buy the stock back from the stock holder anytime.
To understand the stock market, it is important that you understand the difference between the primary and secondary market. The securities are created in the primary market. Whereas in the secondary market trading of older securities is done in the absence of the issuing companies. When people talk of the stock market they’re speaking of the secondary market.
6.Why do stock prices change?
Stock prices change primarily because of the supply and demand. If there is more demand than supply then the prices move up. This means that if more people want to buy than sell the prices increase. Similarly, if there is more supply than demand the prices will reduce.
7.How to buy a stock?
The two principal ways of buying a stock are: Using brokerage and DRIPS& DIPS.
When you buy a stock using brokerage you are offered advice and your account is manged as well, but this costs you a lot. The internet offers many discount brokers these days. On the other hand, DRIPS (dividend reinvestment plans) and DIPS (direct investment plans) permit the shareholders to buy stocks directly from the company. This is a great way of investing regularly.
8.Reading the stock table
This is another important aspect to be known about the stock market. There are 12 columns in the table each representing a different entity. If you are too lazy for all this then you could just take the quote from the net.
Well you have a few animals at each other’s throat on Wall Street always. These include mainly the bulls (the optimists) and the bears (the pessimists). You’ll also find chickens (quite literally) and pigs (literally again).