A stock, also referred to as equity, is a type of tradable financial asset that represents your share in the ownership of part of a corporation. By purchasing stock in a company selling shares, you own a portion of the company.
Stocks are sold in units known as shares, and they’re sold primarily on stock exchanges. However, there are private sales as well. To purchase corporate stock shares, you would have to go through a stockbroker who trades professionally on behalf of his or her clients. Of course, you can always open your own brokerage account and trade on behalf of yourself, as long as you adhere to the government regulations intended to protect traders and investors from fraudulent practices.
The purpose behind corporations selling (or issuing) stocks is to raise funds for their business operations. Once someone becomes a shareholder, they become a part-owner of the issuing company and will have varying claims to part of the corporation’s assets and earnings.
The ownership is determined by the number of shares a shareholder owns in direct relation to the number of outstanding shares. This value is shown in percentages, meaning that if a company has 1,000 shares of the outstanding stock and one person purchases 100 shares, they would then have rights to 10 percent of the company’s assets and earnings.
However, stockholders don’t have ownership over the corporations—only the issued shares that they’ve purchased. Additionally, corporations are recognized by law as special types of organizations as in individual legal persons. What that means is that these corporations file taxes, can own properties, can borrow money, and they can be sued, among other things.
When a corporation is viewed as an individual rather than an entity, it owns its own assets. Therefore, everything within the corporate offices and buildings undoubtedly belongs to the corporation—not the shareholders. This is important for shareholders to understand in terms of liability, should the corporation go bankrupt or if something else goes wrong.
The stock market operates much like an auction, where the market allows buyers and sellers to negotiate prices and make trades.
However, it’s more like a string of auctions rather than one giant auction as it works through an entire network of exchanges. For example, you’ve probably heard of the New York Stock Exchange or the Nasdaq—these are two of the many different network exchanges that participate.
Companies list the shares of their stock on one of the exchanges through a process referred to as an initial public offering (IPO). Investors purchase those available shares, allowing the corporations to raise money to grow their businesses. These shares can be bought and sold among individual investors as they please, and the exchange keeps a record of the supply and demand of each stock that’s listed.
The supply and demand lists are what help determine the price of each stock asset, which are the levels that investors and traders are willing to buy and sell for.
To purchase stocks, buyers put in an offer or a bid of the amount they’re willing to pay. This amount is usually lower than the amount sellers would **ask **for in a typical exchange. The difference is known as the bid-ask spread. The trade happens when either the buyer increases their offer or the seller decreases their price.
The calculations of the price-setting are generally done using special computer software and algorithms. So when you or your investor go to buy and trade stock shares, you’ll be presented with the bid, ask, and the bid-ask spread on the brokerage website. In most cases, the differences in the bid-ask spread won’t be much, so you won’t have to worry about spending beyond your means.
In fact, the entire stock market works electronically via the internet, versus decades ago when trading took place in a physical marketplace. Each trade moves stock-by-stock, but overall stock prices generally move in bulk due to political events, economic reports, news, and plenty of other ever-changing factors.
The stock market has generated a significant amount of wealth over the years. The S&P 500, which consists of 500 of the largest publicly-traded companies in the United States, is responsible for returns between 8 and 12 percent annually.
With those rates, if you were to invest somewhere around $10,000 in the stock market around 50 years ago, your money would have amassed to over $400,000 today. When you think about it, investing in stocks is a great foundational way to build wealth and save money so that you can have an income once you retire or for other purposes.
However, it’s important to note that stock market rates don’t go up every single year, and the S&P tends to fall every so often over a 10 year period. So, you’ll have to do deal with some volatility—but you shouldn’t let that deter you from investing as there are plenty of benefits to doing so including (but not limited to):
As mentioned, investing in stocks is a great way to grow your wealth over time. Of course, it’s important to understand that there are no guarantees as to how well your investment will perform, but that doesn’t mean you need to buy up shares for the next big tech empire or franchise to earn a decent return.
The key is to pay close attention to the market reports so you know when to keep and when to trade.
The stock market may come with some volatility, but there are ways to protect yourself from losses. For example, you can diversify your investments by including a mix of stocks, bonds, and other fixed-income securities as well as CDs and savings accounts.
More often than not, when the stock market is at a low, the bond market starts to see a high, and vice-versa. The point is that you don’t have to blindly invest in shares and hope for the best. You can leverage some control over the volatility by strategically diversifying your investments.
Inflation reduces your purchasing power of currency over time, which makes it your enemy when you’re trying to save for significant purchases such as a house, retirement, and so on. The Federal Reserve tries to keep inflation down to two percent, but this could still make a huge dent in your savings account when it comes time to use it.
By investing and diversifying, you won’t have to worry about inflation eroding your finances. This is because a company’s profits should grow at the same rate as inflation, unlike a savings account (even if it’s a high-yield savings account).
The best aspect of investing to grow your wealth is that you don’t have to hand over thousands of dollars to get started. You can start by setting aside a little bit of money (we’re talking $4.50 latte little unless you’ve been to Starbucks recently then we’re talking $5.19).
It’s a very low-risk way to start playing with stocks with little money.
So, how do beginners buy stocks?
You can start investing by transferring the money you intend to invest into a free brokerage account. A brokerage is essentially a business that employs brokers, who act as the middleman between buyers and sellers, facilitating each investment transaction.
They take a small fee of your investment earnings for the work they do, and some brokerages allow you to pick your own stocks while others pick the stocks for you. Of course, if you’re unhappy with your brokerage, you can switch it up.
Here are some brokerages you can get set up with TODAY:
To get started, figure out how you want to invest in the stock market. If you’d like to do your own investing rather than having an expert do it for you, you’ll want to look into online brokerages to see which suits you best.
Another common way to get started is by investing in your employer’s 401(k) plan. All you have to do is make small contributions on a regular basis and your employer will match those contributions as the account matures over time.
Technically, there’s no minimum to get started with investing. However, certain brokerages will require a certain amount to work with you and some will also have limits as to how much you can invest all at once.
There are three factors that will impact the amount of money you need to begin investing:
Many people like to start by playing with penny stocks since they allow you to trade for under a dollar. However, penny stocks aren’t really recommended long-term and they often cost more than what they’re advertised for.
Ideally, you’ll have done your due diligence and landed on several stocks you want to invest in. Depending on where you want to invest, you could be looking at shares that range into the thousands of dollars.
Another option is investing in fractional shares, which are typically offered by brokerage startups. Fractional shares are exactly what they sound like—a fraction of an entire share that costs you less.
Brokerage apps like Stash and Robinhood offer commission-free fractional shares, which are a great way to get some practice with stock market investing. The advantage here is that you can buy a wider variety of stocks for less, rather than being stuck to buying one or two more expensive shares.
For example, you can buy five dollars worth of Amazon fractional stock rather than purchasing a share that costs upwards of a thousand dollars. You’ll still see some growth over time, although it won’t be as much as you would buying full shares.
While low-cost stock options are great, you still have to watch out for trading fees. For example, let’s say you invest $100 on a single stock with a trading fee of $5. You have to pay that fee immediately upon investing and when your stock sees movement. So, if your stock goes up by $10 and you sell it, you’ll have to pay another $5 fee—and you’re back to where you started with your $100 because your gains have just been wiped out by fees.
Of course, if you were investing between $1,000 and $5,000, your profits wouldn’t take much of a hit.
Additionally, most online brokers charge between $5 and $7 in trading fees, and they tend to consistently drop their prices. So, if you’re planning on investing below $1,000, it would be smart to find a commission-free broker.
In essence, the more you can invest in the stock market, the better. But that doesn’t mean you should go overboard. A good rule of thumb is: Never invest an amount that will end up risking your financial future, and never invest any savings you’re going to need within the next 10 years or so.
There’s a lot to learn about the stock market and investing. But as a beginner, it’s most important to do your research, start small, and build your portfolio over time—especially if you plan to invest without the assistance of a broker.Disclaimer: This content is intended for informational purposes. Before making any investment, you should do your own analysis.