When learning anything new, it always seems like there is so much you don’t know and no clear starting point. You can buy the books or listen to the podcasts, but depending on the subject my attention is only held so long before something shiny pulls me in a different direction. As mentioned in my first IFDBAD post, what I have found helpful is installments; little doses of information at a time that builds into an actual understanding of something. Depending on your how much you already know, the first few installments may seem redundant. When it came to investing for me, I started at the very bottom rung of the ladder with what it is and how it works.
I wasn’t kidding when I said that I have a leather bound notebook I’ve been using to take stock market 101 notes – starting with the meanings of these words I had heard so many times before.
From the beginning…
What is a stock?
In laments terms, think of it as crowd funding. Companies need to have money to start out, however unlike all of the GoFundMe pages we see on Facebook nowadays, stocks will actually (hopefully) pay back. There is always a chance the company will be unsuccessful and you’ll lose your investment, hence why it feels like socially acceptable gambling.
Stocks are sold in shares, which means for each you purchase you get one piece of the pie. The more shares of the company you buy, the more slices you get.
Can I buy stock in any company?
Short answer – no. First, companies need to be publicly traded – privately traded companies usually limit their number of stockholders to a few key investors and their employees. If the company needs more funding to expand they may turn to the public, and that’s when they become a publicly traded company.
When a publicly traded company starts out, their stocks are usually fairly inexpensive (think penny stocks, <$5/share). As they grow into a profitable business, the value of their stocks go up. So, if you purchased stock when it is inexpensive and the company grows significantly, voila! You’ve made some dough.
Looking for a prime example of this? Think Apple.
What are the different types of stocks and how do I make money?
While there are numerous ways to classify stocks, to start investing I’ll give you the two very most basic types that you should know.
Common Stock: A common stock is a basic share of a publicly traded company. These sometimes come with voting rights for how the company moves forward, though it depends on how many shares you have and the company itself.
You can make money off common stocks through either dividends, when a company pays a portion of their profit to you or unrealized gain, when the stock you’ve purchased has gone up in value (capital growth) over time. Once you cash that sucker out (sell it) it becomes realized gain.
Preferred Stock: A preferred stock is less traditional than common stocks as buyers make money through receiving a fixed rate dividend regularly as long as they hold the stock. Buyers don’t typically get voting rights, and the company has a right to buy back the stock at any time. These stocks act more like bonds, but buyouts are usually higher than the price paid, so buyers typically make money off them.
It’s also usually difficult and expensive to bring a company from public back to private, just ask Elon Musk.
What makes stock prices rise?
Supply and demand, baby. If a company is doing well financially and continuously growing, their value increases. Other factors go into this as well; think leadership, bad press, product market, etc. Anything that increases the projected value of the company will increase the cost per share.
Adversely, there are many things that could make the value of a company decrease. Examples include an over-saturated market, a poor economy, negative press or leadership changes, a failed product, etc. If this is the case, stock prices (and value) go down.
That’s all for today, folks. Hopefully your head doesn’t hurt and this information was easily digestible. Stay tuned for the next segment of this series where I’ll review how to choose a platform, how much to invest, and how to choose a stock.