Some of us are experts in finance and understand the reality behind what we do financially everyday, we read the paper daily and simply understand all there is to know about the articles, including all those complicated initials; S&P, DOW and others. For those of us that are not at that level, here is a brief overview of what the stock market is and how to invest in it.
These days, a lot of ordinary people put part of their savings in the stock market rather than in the bank. Many individuals have managed to make good returns on their stock investments over the past couple of decades – far better than a regular savings account. But the stock market can also be a risky place to keep your money. A lot of investors, both large and small, have lost a great deal of money in the market since the start of the current economic downturn.
So, what is the stock market and how do you use it to invest in stocks? A stock market is where companies can raise money by issuing shares (stocks) to the public. When you buy shares in a company, you are buying a small part of that company’s capital. For instance, if a company consists of a million shares and you buy a thousand, you now own 0.1% of that company.
These shares are also traded in the market, through a stock exchange that might be a physical exchange with a trading floor, or a virtual exchange where trading is done with computers that can be located anywhere. If you want to buy or sell shares, you don’t need to go looking for someone to trade with – you just contact your stockbroker and ask him to take care of the transaction through the stock exchange. You can either call your broker, or use one of the online brokerage systems that have become very popular recently.
On the exchange, buyers are matched with sellers, and the transaction is carried out in a matter of seconds. If you are looking to buy shares, you give your broker the stock code, the number of shares you want, and the price you are willing to pay (exact or maximum). Alternatively, you can ask him to buy at whatever the market price is. If you have shares to sell, you should specify the price you are looking for. You have to pay your stockbroker a fee for conducting business for you, and part of this fee goes to the exchange. Fees are generally lower if you trade online than if you instruct your broker by phone.
While many countries have only one stock exchange, larger countries such as the US have several. The largest stock exchange in the world is the New York Stock Exchange (NYSE). The AMEX (American Stock Exchange) is also in New York, and so is the NASDAQ (National Association of Securities Dealers), which trades shares in technology-related companies. There are also stock exchanges in other cities such as Chicago, Boston and Philadelphia.
Each exchange reports a number of different stock indices, which tell you how well a certain section of the market is performing. Among these, there are three indices that are normally reported on the evening news. You have probably heard of the Dow Jones Industrial Average. This index consists of 30 large stocks listed on the NYSE, and is often seen as a good gauge of the national economy. Its components include such household names as Wal-Mart, IBM, Exxon and AIG. The S&P 500 lists 500 large companies, and is actually a better general economic indicator than the Dow. The NASDAQ-100 represents the 100 largest companies on the NASDAQ exchange.
I hope you have found this small lesson on stocks useful, I will be featuring more basic articles about finance and the economy for others that may need to catch up. If there is a particular article you like, or want to hear more about, leave us a comment.