2 minutes of basics…
Over 400 years after the establishment of the world’s first stock exchange, the Amsterdam Stock Exchange, the stock market has continued to bloom. Today, there are over 60 stock exchanges and at least 630, 000 publicly-traded companies in the world. However, the major ones are the U.S.’s New York Stock Exchange (NYSE) and the Nasdaq, Japan Exchange Group (JPX), and the London Stock Exchange (LSE).
According to a 2010 poll by Gallup, 54% of Americans were found to own stocks. By 2020, the figure had jumped to 55%. That is, more and more people are investing in the stock market and reaping bountifully from it. Therefore, it is high time you too joined the train and here is how.
How the Stock Market Works
Before you participate in the stock market, you should first understand how it works. So, first, what is stock? Stock, also known as “equity” or “share,” represents ownership in a company. As a result, for example, when you buy the shares of Company XYZ, you automatically become entitled to a portion of its:
- Assets (what it owns)
- Earnings (what it earns)
This portion is a measure of the shares you own in proportion to the total number of the company’s listed shares, known as outstanding shares. Note that a company must be listed on a stock exchange before you can buy and sell its shares. For instance, if you own 200,000 shares of Company XYZ which has two million in outstanding shares, your ownership entitlement will be 10% of its assets and earnings.
The process of trading stocks has considerably evolved over the years. In the early years, it used to be a physical affair. Now, with the advent of the internet, it has not only become mostly electronic but also better regulated and more professionalized. Nevertheless, the nature of the process is still the same: buyers and sellers place a bid and ask prices for the stocks they want to buy or sell.
A bid price is a price at which a stock trader is willing to buy the shares of a company. An asking price, on the other hand, is the price at which another stock trader is willing to sell shares of the same stock. A trade can only occur when the bid price and the asking price are the same or close. These prices are set based on the laws of supply and demand. That is, the more the buyers of a stock and the less its sellers, the higher its price.
Benefits of the Stock Market
The stock market holds many benefits for you. For example, as stock prices tend to rise over time with economic growth, through capital gains, investing in publicly-traded high-growth companies is a sure-fire way of growing your net worth with time. Also, you can create an extra source of income by buying dividend stocks. A dividend is regular payment companies make from their earnings to their shareholders.
Also, by investing in the stock market, you can beat inflation. With your stock investments, the value of your money will always be kept.
