An Intro to Stock Markets
Nearly everything we own was made by a company. The chairs we sit on, the computers we work with, and the phones we use; all were made by Ikea, Google, Apple, and the like. Even the foods we eat and the houses we live in came into being with the help of some large agriculture or construction firm. These companies are incredibly large and powerful, with billions in net worth. To the average citizen, they may seem overwhelming. How could anyone hope to control these huge forces responsible for shaping the economy?
However, anyone can own a company with just a couple dollars. That’s because companies, in order to raise money, will sell pieces of themselves in packages called “shares”. How much do these shares cost? A measure called book value shows what each share of a company should be worth based on factors like net profit and numbers of shares issued. However, their selling(market) value ultimately corresponds to what investors think the company is worth. New information like quarterly earnings is always being absorbed into the market and reflected in a stock’s price. For example, if a company releases an innovative new product, its market price will likely jump up because investors will predict that the company will do well and rush in to buy its stock(increasing demand pushes its value up). Investors should take note if a company’s book value and market value have a large discrepancy: the stock may be overvalued, and will likely become cheaper in the future.
Now, we’ve referred to the market several times, but what exactly does that mean? Long story short, the market is just a place to buy stock(also called an exchange). Simple supply and demand laws apply: if lots of people want a stock, the price is high and vice versa. Trading doesn’t just happen at one place; there are many exchanges in each country. In America, the most significant are the New York Stock Exchange, the Nasdaq(National Association of Securities Dealers Automated Quotation System), and the American Stock Exchange. While these exchanges have physical locations, investors usually buy and sell securities online with accounts from investing companies like Charles Schwab, Scottrade, and E*Trade. While these usually have fees every time you trade, apps like Robinhood allow users to buy and sell for free. To buy a stock, simply look it up on the trading account’s search bar, and click “buy”. The transaction is usually very quick, and in a matter of moments, anyone can own a piece of a company.
So, what should new investors invest in? On sites like Yahoo Finance, there is a side bar labeled “fundamental analysis”. With the numbers displayed, investors can estimate if a company is worth putting money into. The simplest yet most important fundamental is “beta”, an indication of how risky a company is in comparison to the market(with a beta of 1). A beta higher than 1 means the stock price will usually move more compared to the market. If the market has a good several days, your stock will have had a great one. A bad one, and your stock might have done terribly. Basically, the higher a beta is, the more it moves when the entire market moves. While valuations like EPS/earnings per share(amount of extra money a company has on hand) and PE/price-earnings ratio(relationship between market price and profits), risk is easily the most important factor to consider. This is because the riskier a company, the less trustworthy it is. And trust is ultimately what determines if investors will buy a stock and keep it for long.
How can we look to see how all the companies, or at least a good representation of them, are doing? Indexes like the Nasdaq, Dow Jones, and the S&P 500 consolidate a large number of companies to measure how the overall economy and stock market is doing. If these indexes go up, it means generally, companies you have money in have had a good day, with the reverse also being the same.
Owning parts of companies has value. They control a significant amount of the world’s money, and being a shareholder gives you some power over how they move forward. Furthermore, investors can earn money by putting cash into companies that will continue to grow. While these piece was just a brief introduction to stock markets, different investing strategies will be covered in the next article.