Filed Under Beginner Stock Market Investing |
In the beginning, the stock market can be very complicated and confusing. But the fact that the stock market is the oldest form of investment should be very comforting and help build a desire to understand it further. But to do so you’re going to need to understand the very base fundamentals. Knowing the basics can, and often will, determine whether you make or lose money on the market.
Let’s start by dissecting the share of stock. What is it? A stock is nothing more than a piece of paper that purports to be a right to a share of a company’s earnings or losses. Meaning, if you buy a share of a company and it does well, you have a right to some of the profits. If the company goes into the toilet, well, your share is worth less.
So does buying a share mean you now have a say in how the company will be run? Yes and no. Not directly. You will not be consulted for purchasing, debt, finance, advertising, or anything like that. However, each share you own entitles you to a vote for who should comprise the board of directors. The board is who actually makes the decisions, and so you will indirectly be able to help the company make moves in the right direction.
What kinds of shares exist? Well there are two types. Common stock is the most typical. When people buy ’shares’ they are usually buying common stock in a company. Really, a common stock share is nothing more than a share of profits and losses.
The other form of stock that can be bought is ‘preferred stock’. Preferred stock carries with it a few added benefits. Although preferred stockholders do not get to vote on the board, they do usually get a consistent dividend that common stock does not, and preferred stock usually gets paid back first in case of company liquidation.
In other words, preferred stock is more expensive but allows you to recover more of your money (and first) in case of disaster, while paying a comfortable income for doing nothing more than owning shares.
Finally, let’s take a quick look at what causes a stock price to change. The simply answer is that stock price is affected by supply and demand. It’s that easy. If more people want to buy a stock than holders are wanting to sell, then the demand is high and supply is low. Thus the price moves up.
If more people want to sell a stock than those that want to buy, then the supply is high and the demand is low. The price moves down. Easy!
