Stock Market Basics - All You Need to Know about Stocks
It is wise to learn the stock market basics before investing; otherwise your dreams about how nice it would be living out of investing can be blown away with single trade!
It is wise to learn the stock market basics before investing, otherwise your dreams about how nice it would be living out of investing - sitting back, watching your investments grow and collecting the dividend checks- can be blown away in a minute!
Stocks are one of the greatest financial instruments ever invented for building wealth. They are the cornerstone of nearly any investment portfolio. When you start on your road to financial freedom, you need to have a solid understanding of stock market basics.
Over the last few decades, the average person's interest in the stock market has grown exponentially. Years ago stock investing was in domain of rich people, but nowadays it has turned into the vehicle of choice for growing wealth. This demand coupled with advances in trading technology has opened up the markets so that nearly anybody can invest in stocks.
Despite their popularity, however, most people don't fully understand stocks. There is a lot of misinformation based on a get-rich-quick mentality. Some people think that stocks are the magic answer to instant wealth with no risk, but this is not the case. Stocks can create wealth, but they aren't without risks! The key to protecting yourself is education, you must learn about stock market basics, you must understand where you are putting your money.
Stock Market Basics - What is a Stock?
A stock is a small share that represents a partial ownership of a company. Stocks are issued by companies in order to raise capitals and are bought by investors in order to acquire a portion of the company.
Stocks have a lot of advantages over investing in bonds because they represent ownerships in a particular company. This gives the investor a certain right to participate in making decisions for the company. Partial company ownership also allows the stockholders to benefit from the company's profits which are distributed in the form of dividends.
One of the unique features of stock ownership is the notion of limited liability. If the company loses a lawsuit and must pay a huge judgment, the worse that can happen is your stock becomes worthless. The creditors can't come after your personal assets.
Stock Market Basics - Where are Stocks Traded?
Stocks are traded on stock exchanges, where the buying and selling takes place. Today classic floor exchanges are mostly replaced by electronic exchanges. Every country may have a couple of different stock exchanges and large corporations may be listed in several different locations.
The stock market basically consists of the primary market and the secondary market. In the primary market, companies raise funds by selling shares in the company to investors. In the secondary market, investors buy and sell those shares to other investors depending on the current market conditions. Investors buy stocks with the belief that the company will grow continuously to raise the value of their shares. Acquiring stocks from a new company is considered to be more risky than buying shares from a well-established company but the potential gain is much higher.
Stock Market Basics - How Can You Buy Stocks?
Most stock trading activities are done through an intermediary called a stock broker. Brokers, who take and execute orders from the investors, can also offer investment advices and analyses to their clients. Such brokers are called full-service brokers and they charge a relatively high commission. The types of brokers that do not offer investment advices to their clients are called discount brokers. Investors who wish to save more money usually hire discount brokers because they charge less commission. In the last decade with the popularity of internet a third group of brokers became very popular, online brokers. They only accept orders via internet they the do not offer any additional services and therefore their commissions are the lowest you can get.
Is there Risk Involved in Stock Investments?
Many people choose to invest in the stock market for the long term. Stocks sometimes drop in value and you can lose money as well. There are no guarantees when you are investing in the stock market and you have to be prepared to take a loss as well as a gain.
The goal of these stocks for beginners guide is to introduce you to the financial world of long-term savings and investment in stocks. You will see that long-term savings through investment in the securities market is integral to the economy and your own personal lives.
Written by: Goran Dolenc
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