What is the Stock Market, and How do I Make Money?

Make Money on the stock marketWhat is a stock?

A stock is basically a small piece of a company.  When a company goes from being private to public, it breaks itself up into millions of parts (called shares), and puts a set price on each share, say 10 dollars. The owners, board members, employees, large investors, banks etc can buy, or are given, a percentage of shares before the market opens.

When the company is ready to go public they sets aside a given amount, say 30%, and then “sell” these small pieces of the company to the public.

Anyone can then go to the “stock market”, and buy shares for themselves.  This is why the price goes up and down daily.  It all depends on what people are willing to pay for, or sell their shares for.

Not only do you own a small piece of the company but many times you have voting rights in the company when big changes have to be made.


How do I make money in the stock market?

There are two ways:

1. You buy the stock for less than you sell it.
Most stocks can be sold anytime when a stock market is open.  Most of the time, the bid price (what you want to pay for it) and ask price (what people want to sell for) remain very close to the market value (the average current price of the stock). There are different ways to buy and sell stocks (which are covered in our Stock Market Definitions Tool under our OMD Tools Section).

2. The stock pays a dividend.
A dividend is a set amount that the company pays to share holders.  Each company determines what amount they pay (usually done as a percentage of their earnings), and when they pay it.  Most stocks pay dividends every quarter; some pay twice a year, and some pay special dividends every so often (kind of like getting a bonus from your employer).


What is the stock market?

 A stock market (also called a stock exchange) is the generic name given for the place you go to buy stocks, bonds, mutual funds etc.Imagine it as kind of like a large stock mall, with a bunch of stores inside that carry different kinds of stocks. Each small store is called an exchange, and they basically handle certain types of stocks.The Dow is basically the largest 30 companies in the U.S.The NASDAQ is basically where technology shares are listed.The S&P is basically a group of 500 various companies.The Russell 2000 is basically where smaller companies are traded.

Then there is the over the counter exchanges where international, and small companies are sold.

It is also important to remember that every country has its own stock market. When a company is “listed”, it means that stock can be bought and sold only at a certain exchange.

So if a company is listed on the Hong Kong, Korean, London or US Markets you can have access to the stocks in those companies traded in the country using the local currency.


How do I buy a stock, and what is a broker?

A broker is a term used in many industries. A broker is basically the main person in charge of a real estate office, or a broker can be a specific person who has the ability to reach a certain market (also called a brokerage house).To buy a stock you need to open a special brokerage account, because they are designed to give access to various stock markets.When you buy and sell a stock it is called “Trading”. There are numerous on-line companies that offer the ability for people to buy or sell various investments (which is easier and cheaper, but typically you need 500 US Dollars to start an account).

You can also go to a company, and have an individual help you pick and choose investments. This usually costs you more money to buy, and sell investments, but can be done right along with your regular banking.Hopefully these investment firms will provide more service than an internet-based account.

Although doing your research is important, because there are many “professional money managers” that are not so “professional”.  Remember anyone can access a stock market if they open an account wit a bank, brokerage firm, online trading company etc.


Isn’t buying stocks the same as gambling?

roulette1 First of all, any time you invest your money you are taking a gamble. Secondly, most definitions of gambling refer to the act of betting money on some intangible asset (like a poker game, athletic event, slot machine, raffle etc).This means you don’t really own anything, but hope that, by chance, you will be chosen or win at some game.So in the truest sense buying stocks is a gamble. However unlike other forms of gambling, you actually own a part of a tangible asset like a company, or basket of companies (like a mutual fund).

The other area that sets buying stocks apart is that in most gambling it’s an all or nothing deal.  With stocks you can buy and sell at regular intervals, and if you don’t like where the stock is going you can pull out and sell, without losing all your initial investment.

Also if you own a dividend paying stock, you get money back regularly, even while you wait for the stock price to go back up.

Why should I buy stocks

 Well first of all you have to do something with your money.  Hiding it under your mattress is never a good idea, because every year it loses value (due to inflation, which makes the price of things go up over time).Spending all the money you earn is a bad idea, because at some time you will not have the ability to earn money by working.Finally if you want to make money, the best way is to make your money, make money for you.  One way your money can make money is to buy things that have the potential to go higher after you buy it.Since stocks are easy to buy and sell on the stock market, and you actually own a piece of a real company, they make good investments.

A well run company that is increasing profits, and providing a service or product people need has a better chance of going higher than most other investments. Also many dividend-paying stocks are paying more than bonds.

These companies actually pay you money, as you wait for the stocks to go higher.Yes there is the potential to lose money on the stock market. However the stock market, over time, has proven to be a consistent way to increase your wealth, more any other asset class (outside of possibly real estate or owning your own business).

So don’t let fear stop you from investing at least some of your money in the stock market.


Getting paid to wait – Dividends

 A dividend is the set amount of money companies pay back each year to share holder (usually every quarter).The amount is determined as a percentage figure and we call this percentage a yield.The yield is determined by the amount of money they pay, divided by the amount the company earns.  Most dividends are paid by larger and more mature companies(as well as REIT, ETF and other entities).

Newer and fast growing companies usually do not pay a dividend, and a company can stop paying them at any time, or even change the amount. For bonds the effective interest rate is known as yield.As you can see there is a number of ways to make money on the stock market, and dividend paying companies basically pay you to wait for the price to go up.

So don’t let fear stop you from investing at least some of your money in the stock market.

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