So, you've heard some of your friends talking about how the price of some stock fell 30% in one day and how it's the end of the world. You don't tell them this, but you have no idea what the stock market is, or why anyone cares about it.
Well, then, this article is for you.
DISCLAIMER: This article does not constitute financial advice. It is purely meant for educational purposes. Anything stated in this article, fact or not, is the author's opinion. The author disclaims any and all responsibility for damage or loss incurred as a result of this article.
What are stocks?
The first thing one might ask is, what exactly are they? Well, essentially, owning a stock means owning a fraction of a business. Company owners will split up the ownership of a company into parts. In most cases, several million parts. These parts or, "shares", are then traded on the stock market.
You might ask, "why would companies sell parts of their company to the public?"
The answer is quite simple. They can use the money they get from these stocks to expand the company or buy assets. It is a pretty good way for a company to get a bunch of money without lending it from a bank.
How do stocks get onto the market?
When a company decides to start selling stocks, they put the stocks into the market on what's called an IPO or Initial Public Offering. This is usually just a baseline price, based on what the stock market thinks the company is worth. From there, people can buy stocks and sell them as much as they want.
How do stocks benefit the shareholders?
Every so often, a company with stocks on the market will decide to share some of its profit with its shareholders. They do this to give people an incentive to buy their stocks, which in turn, increases the stock price and makes the company even more money.
It is important to note that companies are not obliged to pay dividends to their shareholders. They can do this as frequently or infrequently as they want.
Additionally, when a person buys ordinary shares, as opposed to preferred shares, they get voting rights in the company. So when a company needs to make a decision about something, every shareholder gets a vote. A shareholder's vote has a weight proportional to the number of shares he owns.
Preferred shares are called that because they are typically the type of shares to receive dividends.
So how do I buy myself some stocks?
Buying shares is pretty easy. The first step is to open an account with a registered stock-broker. In South Africa, there are many brokers that allow you to trade on the JSE (Johannesburg Stock-Exchange).
From there, you can deposit money into your trading account and start trading shares.
Here are some things you should note before buying shares:
Before buying a share, it is important that you research the company you are investing in. Find out who the directors are, what the quality of the decisions they have made is. Often it is also a good idea to consult the opinions of big investing companies. They will often make the market sentiment publicly available. If the public at large thinks it is a good investment, it probably is.
The stock price
The price of shares rises and falls throughout the lifetime of said shares. When people think the value of the company is going to decrease, they will sell their shares. An increase of shares on the market decreases the value of those shares. Conversely, when people think the value of a share, and therefore the value of the company, will increase, they are incentivized to buy more of that share. This decreases the volume of the share on the market and decreases the value of that share.
The collective opinion of all traders on the network about the value of the stock is called the market sentiment. If the market sentiment is low, stock prices tend to decrease. The converse also holds.
But I only have 20 bucks... How can I get in on the action?
Trading stocks doesn't require vast amounts of money. A good way to get started if you have very little money to spare is to deposit some money into your trading every month without trading any stocks and waiting until the balance of your trading account is around 5-10k ZAR. (Approx. 70-400 USD).
It is important to remember that trading stocks is very risky, so you shouldn't put money that you could still need into stock trading. If things go sideways, you need to be prepared to lose your money, or at least be able to wait until the stock price recovers.
Final words
I hope this article has been informative and successful at explaining the basics of the stock market. Of course, there is a lot more to know about the stock market, but this should be enough to get a basic understanding of what stocks are and how they work.
Some websites I frequently use to get information about the stockmarket include:
Hey guys, thanks for reading my article on stocks and the stock market. I wanted to cover some other stock market-related stuff, but I don't want to be writing a novel for every article. Let me know what you guys think, and if I should cover other stock market stuff like warrants and futures in a separate article. Also, subscribe to the mailing list to be notified every time I post an article.
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