Why Invest In The Stock Market?
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Never forget rule No. A quick and efficient way of making money is through investment in stocks, provided you understand the business. The stock market is a crucial financial institution, which fulfills the need of capital that businesses are looking for, while letting investors profit as shareholders in companies, creating a win-win platform for both, investors and businesses.
However, making money on the stock market is another ball-game altogether. Trading stocks requires a substantial amount of study and understanding, before you put your hard-earned money on the line and begin making profits.
The following article attempts to give an insight into the working of the stock market and what stock investing for dummies entails. When asked what the stock market will do, J. Morgan replied, "It will fluctuate. One is often at a loss to explain the meaning of certain investment option stock stock trading terms, necessary for any successful attempt at taming the stock market.
For investors new to the stock market, knowing what these financial terms imply, can be the fine line between success and failure. Rather than giving a detailed definition of this basic unit of trading, let's take a look at a small example of how stocks are created.
It will also be a lesson on what they are investment option stock stock trading how they function. An entrepreneur finds an unexploited niche of the economy, an area where there is latent demand and can be fulfilled by launching certain products.
To go about this, he needs to establish a company which will produce, market and sell this product. However, before he realizes his dream of becoming the next Rockefeller, he must answer a very basic question- Does he have the money to do these things?
The answer, in most cases, will be in the negative. How then does one go about raising money, or more formally, raising capital? The easiest, safest and quickest way to do this is to offer the public investment option stock stock trading stake in his enterprise, a small portion of holding for which they shall pay a particular sum. This holding is known as stock, the unit of which is a share. One may hold stocks in IBM, but buy a hundred shares of Exxon. The entrepreneur now has sufficient money to buy equipment, rent space, hire workers, run an assembly investment option stock stock trading and market his revolutionary product.
The shareholders - the people who purchased stock in his company - have limited exposure to risk, only to the extent of their holdings, if the venture suddenly folds. A company goes public or becomes a joint-stock company, when it sells a part of its equity holding to raise capital, through an IPO Initial Public Offering. The stocks are sold at investment option stock stock trading fixed value in this initial sale, after which they can be traded on the secondary market, which is the stock market.
The price of shares depends upon several things, the company's profitability being one of the prime factors. If our entrepreneur can make decent profits from the word go, the price of his stock shall increase as people compete to purchase the same number of shares, however, if he runs into losses, the price will go down.
Stocks can be of the following types:. Preference stockholders are granted privileges over and above that of common stockholders. They are distributed dividend before the common stockholders, and also hold a higher claim when it comes to asset distribution, in event of the liquidation of the company.
This is the equity that a company offers its stockholders as ownership. The common stockholders have voting rights and are invited to the annual general meetings of the corporation. They can vote for selection of management and receive dividends from the payouts of the company's profits. When a financial instrument derives its value from the price of the stocks that support it, it's called a stock derivative.
Most often the underlying stock is an index, which fluctuates with time, changing the values of the derivatives. The most common types of derivatives are futures and options. Companies and governments often issue bonds to meet their working capital requirements. These bonds are issued as a form of loan, the purchaser is the lender and the issuer is the borrower. There is a fixed rate of interest to be paid on bonds and the full amount is redeemed at the end of the maturity period. I buy on the assumption that they could close the market the next day and not reopen it for five years.
After an IPO has been made, a company's stocks can trade on the investment option stock stock trading exchange. A stock exchange is like a market for stocks and traders. It is a place where people willing to buy stocks meet those willing to sell them, and speculation in future prices and profits is what drives the trade.
Stock trading these days is usually undertaken by stockbrokers on behalf of traders, who buy and sell shares according to market conditions.
With the advent of the Internet in the business sphere, the virtual trading terminal has become the accepted norm of stock investing.
Here, traders working on computer terminals bid through computers within a network, and provide investors with online accounts to buy and sell stocks. One does not need to go to the stock market to know the stock prices and quotes, it can be done from the home or the office with the help of a laptop and an Internet connection. Every investment option stock stock trading market has an Index, which is based on statistical calculations and gives an idea about how listed stocks are performing.
The value of the index is calculated through the performance of a bunch of blue-chip benchmark stocks. Stock exchanges may have specific requirements for companies who want to list their stocks on them. A highly recommended guide on stock investing is investment option stock stock trading book The Intelligent Investor, by Benjamin Graham, a venerable Wall Street master, whose students include the legendary financier Warren Buffett.
Let's look at a few stock market terms. Stocks can be bought on the stock exchange with the help of a broker, or they may be purchased directly from the company.
Most stockbrokers are listed with the stock exchange, giving them the authority to buy stocks on behalf of a trader, investment option stock stock trading one can purchase a company's stocks directly as well. One may buy stocks against money already owned, or it can be arranged through a margin purchase, when a trader purchases stock against the value of those very stocks. Stocks can be purchased when their prices are low, so as to make a profit when prices rise, or they can be purchased at a premium when there is speculation that the company, or even the economy in general is experiencing phenomenal growth and the prices will rise further.
Selling is much the same as purchasing, except that one may have to pay the capital gains taxes on the proceeds earned by the way of sales, if these come within the limits of the taxation law. Selling can be done when the seller is anticipating further losses or maybe when the prices have reached a peak, from which there is a chance of a decline, and the seller wants to short-sell to make a good profit.
Traders gather and communicate their individual stock quotes on the exchange floor, a process called bidding where the stock price changes with every bid and stops only when a bid is singled out as the highest.
Traders aim to Buy stock cheap and sell dear, to investment option stock stock trading profits for their investors and themselves. Another question most beginners come up with is, how are these stock prices determined? A stock exchange is the perfect example of the Law of Demand and Supply in action. At any given point in time, the total number of shares on offer, called float, is in equilibrium with the total demand, the number of shares traders wish to buy.
This is what the term market capitalization refers to, the demand and supply equilibrium of any corporation listed on the stock exchange, the total value of the company's stock at that point in time. Now that you have a basic idea of what the stock market is all about, we can move on to the next step, knowing how to go about investing.
Although one can commission a stock investment option stock stock trading to undertake trading on one's behalf, if you are going the solo route to investing, it's always investment option stock stock trading to be armed with the latest information investment option stock stock trading the tools and techniques of investment analysis.
Once you have decided the amount of money you are willing to invest, it is time to investment option stock stock trading a comparative analysis of some popular stock options. One can go for the traditional blue-chip companies, which provide regular dividend and maintain a good share pricing, the nexus of software, oil and manufacturing, or try a selection of smaller companies with lower investment option stock stock trading prices and market capitalizations, but functioning in areas of the economy which are headed for a boom.
It is investment option stock stock trading to investment option stock stock trading companies that have a reliable consumer base and are market leaders, they face healthy competition yet innovate to stay on top of their game.
Whatever your ultimate decision may be, it can be helpful to take a look for the following characteristics, in a company you have targeted for investment. Is it a Brand? GM, Coke, McDonald's and Apple are some of the giants of their respective industries, companies which play the market on the strength of their brand names and the loyalty of their customers. Pricing and marketing is relatively easier for these companies as they have huge capital investment option stock stock trading, and as a result, their stock prices too, tend to be high.
The advantage of investing with these companies is that they are stable organizations with a global reach and their stock price fluctuations tend to be less, also, they provide good investment option stock stock trading income. Does it possess economies of scale? Large corporations like Walmart, Dell and Lego operate all over the world. They have achieved certain competitive advantages in production which allow them to reduce prices and secures them a large chunk of the demand.
Such advantages are known as economies of scale and allow the companies to create profits from the sheer volume of sales they generate.
China is an example of an international economy working on this principle to capture large swathes of the global consumer demand. It is not just large companies which have competitive advantages, even smaller firms, such as the Solo Paper Cup Company have achieved these economies. Investing in such companies reduces risk to a great investment option stock stock trading as they have global exposure and won't tank up anytime soon. Investment option stock stock trading company with a dedicated consumer base, will tend to weather the storms of economic uncertainty much better than one that cannot hold its customers for too long.
It is important to invest in a diverse range of companies, so as to spread risk and create buffers for your investments. How heavy is the competition? An industry with too many players can be a difficult one to invest in, as a beginner may not understand which companies are bound to do well and which fail in the long run. Sectors like software, food and consumer durables are filled with several large, medium and small cap companies which have their own niches and markets. Investing in such companies calls for extensive analysis and a constant monitoring of investments.
Differentiating between price and value. This is probably the most important factor when one considers investing in stocks. There is often a marked difference investment option stock stock trading the price at which a share might trade and the value that is actually has.
Stock value is an amalgamation of several factors which are more micro-economic and related to the company rather than to investment option stock stock trading variables.
They can be along these lines: Profits over time, past present and speculated. Credit investment option stock stock trading by reliable agencies. Current competitors and future probables. The price of stocks, on the other hand, are influenced by the law of demand and supply operating on the exchange floor, during the session of trading.
A number of buyers and sellers come together and agree on a specific price, which in turn may be investment option stock stock trading inflated or deflated depending on the current economic conditions and general mood of the investing community. This may be due to several macro factors such as: National and international news Economic forecasts Scandals or scams. One must be careful while buying or selling stocks and take into account not just the price of the stocks but also their value, which may often be completely at odds with each other.