Introduction To The Stock Market

A share market, also referred to as a stock market or equity market, is a coming together of buyers and sellers of shares and securities listed on a stock exchange. In simpler terms, stock is a share in the ownership of a company, which is a representation of a claim on a company’s assets and earnings. Owning stocks is among the best tool for building wealth as you embark on your journey to realise financial freedom. The beauty of investing in the stock market is, no work is required from as all you have to do is sit and watch as your company grows while collecting dividends. In recent years, the stock market ha witnessed massive changes driven by constant improvement in trading technology. Anyone can now own stocks given the high popularity of this lucrative investment plan. However, people do not fully understand how the stock market works and there is a common misconception that it is magic answer to all your financial problems. Just like any other investment, investing in the stock market needs a thorough research of the market before committing any of your money.

Ownership. Being a holder of a company’s stock means that you are among the many shareholders of the company and, as a result, you have a percentage claim of everything that the company owns. Once you buy a share, as proof of your ownership, you will be issued a stock certificate. With modern technology, however, you won’t get to use this certificate since all records are kept electronically and with a click of a button, you can buy or sell making shares very easy to trade. Owning stock does not mean that you have a say in the daily running of a company. It means that you get to vote for the board of directors in every annual meeting and that you will receive dividends from the company’s profits depending on the number of shares you own.

Types of stocks. There are mainly two types of stocks.

1. Common stock. This is the form in which majority of stock is issued. It is the common type of stock with simple features. They represent ownership in a company and dividends claim as a portion of the profits. The investor get to vote to elect board members who will run the company and oversee the management duties. In case of bankruptcy or liquidation, the shareholders have limited liability, meaning they are not personally liable for any losses. However, the shareholders will not receive any form of payment until all creditors, preferred shareholders and bondholders are paid.

2. Preferred stock. These represent a greater ownership in the company but without the same voting rights. Ownership of preferred shares means that, you are entitled to payment of a fixed amount of dividend for the rest of the company’s life. Preferred stock holders will be paid off before common stockholders, upon bankruptcy or liquidation. Preferred stocks are callable, which means that the company can purchase them from the stockholders at any time for a given reason.

Trading and buying of stocks. Buyers and sellers meet on exchanges where stocks trade, and decide on a price. Exchanges can be physical locations on a trading floor where transactions take place or can be virtual, where trades are made electronically by computer networks. It is also important to know the difference between primary market and secondary market: A primary market is where a company issues an IPO by creating securities, while a secondary market is where investors trade the certificates of ownership issued to them, without involving the company. Stock prices constantly change due to the market forces of demand and supply. If may people want to buy a stock, its demand goes high making its supply low thus its price goes up. Conversely, if there are many people selling a stock than those buying it, the supply will be greater than the demand and the price will fall. You can buy stock using two types of brokerages. Full-service brokerages charge a lot but will give you expert advice on how to manage your account. Discount brokerages are cheaper but pay less attention to your investment decisions. You can also buy stock through dividend reinvestment plans and direct investment plans where some companies allow stockholders to purchase shares directly from the company.