The stock market is a glamorous world where affluent people bet big money on the rise and fall of stock prices. It's also an established environment for beginner and experienced investors alike to invest their hard-earned money in well-researched companies in order to see slow and steady growth. The stock market is not as daunting as you may think, and you can learn to invest and reap the benefits.
What is a stock, anyway? It's a share of ownership of a company. So if you own stock, you actually have a bit of ownership in the company, and the company will send you annual reports. Shares are sold through exchanges, the largest in the U.S. being the New York Stock Exchange (NYSE). When you put in an order to buy or sell, there is a guy in the "pit" who makes a deal with another trader to get or get rid of the shares you are trading.
Companies issue stock in order to raise money, and anyone can buy or sell shares. Once it has been issued, the trading of the stock is not connected to the company, but is rather done through an open market. Stock prices rise and fall based on several factors including confidence, company numbers, and news stories, and there is usually no way to know for sure in which direction any stock will go. Stocks often come with dividends, an extra plus for the share owner. Dividends are small shares of the company profits that are doled out to all stock owners.
The benefit of owning stock in a company is the ability to profit through a price increase. Prices are constantly changing in accordance with the laws of supply and demand. When a company looks promising, more investors will be interested in buying its stock, pushing the price higher. If you buy low and the price increases, you can sell it for a nice profit. If you wait many years, you could end up with an extremely high return on your initial investment. Another benefit in comparison to other securities is the high liquidity of stocks, meaning you can sell them at your leisure.
The major risk with buying stocks is that prices can decrease and you could lose money. When a stock falls out of favor with investors, more will want to sell, pushing the price down. If you don't get out quickly enough, you could lose everything you put in. Similarly, if the company goes bankrupt, you will lose your investment.
There are many strategies for investing, such as watching price movements and investing in high-growth stocks. Since you can never actually know which way a stock price will go, you need to do research and seek advice in order to pick stocks correctly, and even then there are no guarantees. Novice investors are usually advised to play it safe, which means investing in solid companies that show growth potential, and keeping the stock for the long haul. Diversification (picking stocks from various categories) is key because it gives you the potential to net high profits while spreading out the risk.
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