Stock market investing used to intimidate me.
Before, when people say ‘stock market’ I automatically have a mental image of people yelling at each other while looking at red and green digits in a giant board with big numbers no one really understands. Fortunately, my understanding has come a long way from this.
I have asked people why they don’t invest in the stock market and the most common answer I heard was, “It is only for rich people”. While this may be true in the recent past, things have changed. The concept of stock market is only for rich people stems from the notion before that you have to call up a broker personally. Of course brokers will not waste time helping you if you only have a few hunderd dollars to invest, they will concentrate more on people with thousands of dollars.
Thankfully, this is not the current scenario.
In the internet age, anyone, and I mean anyone can invest in the stock market. We can use it as venue towards financial freedom.
Of course, as with any investment, it is advised that you educate yourself first before diving in. So in this post, I cover the most basic questions that I have when I first starting investing in the stock market.
What is the stock market?
The stock market, in the simplest sense refers to a place where people buy a little bit of the company. which in turn makes them part owner of that company. As with any business, if you are a part owner, you are affected whichever direction the company goes- in success and failures.
The stock market lists all the companies that has interest in selling a part of their company, where people who are interested can buy it. The part of the company is called the stock or share.
Why do companies list in the stock market?
If the company is profitable, why do they need to sell part of their company? Does that mean all companies listed in the stock market are going bankrupt?
I have this question too when I was starting out, and as it turns out, profitable companies still want to sell a part of their company for a number of reasons:
- Expand research to create new products or make improvements on the existing products
- Hire more people
- Operate in additional countries
- Buy more companies
When stocks of these companies are bought, they will have the increased cash to purchase what they need in order to expand their business. This is very important in ensuring economic development and it gives the investors a chance to take-part in the financial milestones of the company.
What does it mean to invest in the stock market?
You as an investor has the aim of buying a share of the company with the intention of selling it more than the amount you bought it for.
Being a stock holder/part owner of a business means that it will also take you where the company is going. If the company is doing well, hurray! The stock price will increase, hence you will receive dividends and give you more profit when you sell it. When the company is not doing well, the stock price will also decrease and hence will decrease your profits, or worse make the stock price LOWER than what you bought it for.
That means you should only buy stocks of the company that you believe will actually perform better in the future.
Who regulates the stock market?
Some people are worried that the market may be rigged.
One of the main pillars of the stock market is transparency and opportunity for all. There are laws and governing bodies implemented to ensure that the stock market is a level playing field for all investors.
In the US, the stock market is regulated by the Securities and Exchange Commission (SEC), which is independent of any political motivation. Outside US, the SEC has its local equivalent in all countries where a stock market is operating.
How to invest in the stock market?
With the birth of the internet, anyone can invest in the stock market through a broker.
There are two types of broker, an online broker and full service brokers.
Each has their own advantages and disadvantages.
Online brokers are very cheap and available for everyone. It involves opening an account with the broker and funding it by linking on your bank account. Once your account has funds, you can start buying stocks. It is very simple and easy to understand. Some of these companies include E*Trade, Charles Schwabb and Ameritrade. Most people today use online brokers.
Full service brokers on the other hand are more of the “traditional” type brokers. They will take time to know you personally about your financial goals, risk tolerance, etc. These type of brokers are more expensive than online brokers but some beginner investors might want to look at them especially when they are intimidated in starting out.
Why invest in the stock market?
Once you have developed the habit of saving, the next thing that we need to concentrate on is investing. Stock market investing is a great way to make passive income. It is a proven path in achieving your financial goals.
Investing in reputable, growing companies will enable you to receive dividends and profit with very little investment of your time and effort. In addition, once you find a reputable company to invest in, you will definitely enjoy larger interest rate for your money than putting in normal savings account.
A word of advice, it is important to remember that you only invest what you can afford to lose. Stock market can be a risky place, but investing in reputable companies can decrease this risk. As with any investments, it is important to educate yourself and diversify your portfolio.
Have you ever invested in the stock market? If no, why not? Please let me know in the comments what tips you need to start investing!