You probably have heard about the stock market before, adults talk about it all the time. But what exactly is this world that adults live in? Let’s find out together.
In short, it’s about money. It all starts when companies like Coca-Cola, Google, and Pfizer need funding, they turn to the public and people like us, and make us an offer. If we accept the offer, we will give them some money, and they will give us something called stock (or “share”), which represents ownership and say in the company’s decisions. With this share in the company, you are entitled to vote in some of their decision-making processes and most importantly, receive a stake of their earnings (known as “dividends”), which is what makes them so valuable. These stocks can in fact be transferred, which means that you can buy the ownership of certain companies from other shareholders at a price. Because this creates a new market of stocks to be traded, we call this the stock market.
Although there is much to be debated about stock buying, a few core ideas are agreed upon. In general, big companies that have consistent earnings and give out dividends consistently are considered to be profitable purchases; whereas smaller companies which do not have a huge stake in their industry tend to be riskier. However, smaller companies also have more opportunities to expand their customer base and therefore increase their income much faster than big companies. Eventually, when the value of small companies become recognised and more people are willing to put their hands on them, the price of the stock you can sell it for will increase, which translates to a profit for you. The former kind are known to be dividend stocks, where your main stream of income comes from the earnings payouts, and the latter are known to be growth stocks, where your profits will come from a greater value of the share as time passes.
That seems to be a lot of information, and I wish there was an easy way we can use to find out what stocks we should buy! A lot of the research has went to find signs that tell us when a stock is going to increase in value, and some of the topics are indeed worth exploring. For example, there are experts who look at the earnings, debt, assets, or a holistic overview of the company to decide its value and subsequently make a comparison to its price. This kind of analysis is called fundamental analysis. There is another school of experts, who also use price trends and study the psychology of other traders. Such analysis is called technical analysis. Both topics are worth reading about, and we recommend you check out our article on trading psychology to get a quick overview of the key insights in this subject.
Also, it is generally agreed upon that stocks, coupled with other investments, are suitable forms of savings in the long term. However, when we do not have a hold on our emotions, it quickly becomes a game of gambling (that’s why you need to be familiar with trading psychology). Therefore, we strongly recommend you approach experts to help you invest. In the past, most of this was done by mutual funds, which is an organization that hires analysts to look at your portfolio and decide what stocks to buy and sell. Even now, mutual funds are still at large, and we strongly encourage you to learn more about them in our article here.
In conclusion, we would like you to consider stocks as a slightly more profitable means of savings, but not to be so obsessed with it that it becomes a form of gambling. Lastly, please consult experts on the topic before making important financial decisions and check out our other articles to gain a more comprehensive understanding of this subject. See you in our other articles!
Do check out:
- The Basics of Mutual Fund Investment
- The Psychology of Investment
- Personal Finance Guide: Creating a Budget that Works
- Initial Public Offering (IPOs): What You Need to Know Before Investing
Founder, Investor & Trader