Introduction to the stock market
By Yinon Arieli
While watching the news on TV or reading the newspaper one encounters phrases
such as “the NASDAQ went up by 15 point” or “Google’s stocks fall 5% in the
early trading session”. These statements are actually information about what is
called the stock market.
Many people find the stock market a confusing place. Some believe that the stock
market is like a casino. They think that investing is a form of gambling, and
the investor more than likely end up losing money. These fears usually arise
from testimonies of family members or friends who did not succeed and lost money
following investing in stocks; while indeed people do lose money in the stock
market, in many cases the investments were done without proper understanding of
the stock market itself, without information about the company issuing the stock
and without proper experience.
Other people view the stock market as an exclusive arena for professional
investors or traders. Thus, they leave their financial decisions to professional
traders.
Obviously, the stock market is a complex environment and investing can be
complicated, but after knowing the facts and understanding the basic concepts of
operation of the market, you will realize the benefits and importance of
educated investing.
The purpose of the stock market
Giants businesses such as Star Bucks, Wal-Mart or McDonalds, which post profits
of billions of dollars every year, were not always as big as they are today.
Star Bucks started as a small store in Seattle, Wal-Mart began as a single store
in Arkansas, and McDonalds was originally a restaurant in San Bernardino.
How did they do it? With vision, proper management and efficient operation these
small start-ups have grown to become global market leaders. But there was
another pre-requisite for growth- capital. And indeed, these companies have
raised capital from investors by selling a share of their business in the stock
market.
When a company is growing, it needs money to expand; modern buildings, more
equipment, new employees, research and development, marketing, all these cost
money.
Raising capital can be done in one of two ways: borrowing money from the bank or
selling a part of the business to investors and using the money to fund growth.
Borrowing money from the bank is often very useful, but it is limited. Banks
will not easily lend large amounts of money to small businesses and this loan
obviously bears an interest. Therefore, many business owners choose the other
option – selling a part of the business to the public. This is done by issuing
stocks of the company to investors through the stock market.
In other words, the stock market is necessary for companies to raise capital
from investors so that they can fuel growth.
Investors and the stock market
A company selling its shares needs to “go public” at the stock market, through
places also known as Exchanges (like the NASDAQ). Each investor pays the company
for the amount of stocks that she is interested in (and can afford) buying, and
in return she gets a fractional ownership of the business.
If for example you bought 5% of a company’s stocks, you now own 5% of the
business. If the company is profitable you are entitled to 5% of profit
available for distribution to the owners, or- dividends.
The stocks of the company are now traded in one of the exchanges in the stock
market, whether in the country where the company operates or in other stock
markets over the world (such as London, Hong Kong, Tokyo, etc). Shareholders can
offer new investors to buy their piece of the business by selling them part of
their stocks. The negotiation between the two sides is carried out through
computerized system activated by broker, who are individuals or firms that
charge commissions for executing buy and sell orders requested by investors. If
there is a match between the offer of the seller and the buyer, the order is
executed. In this case, the seller gets the cash for the sell while the buyer
receives the seller’s stocks. The buyer now owns a share of the company, equal
to the percentage of stocks he has relative to the total number of shares the
company has issued.
Summary and next steps
We have just reviewed the very basic operation of the stock market. Every day
there is a large auction of stocks of many companies in the various exchanges
around the globe. Your role as an investor is to identify the companies whose
shares are sold at an attractive price, which means, at such a price that after
you buy them their value will rise and you will be able to sell them at a
profit.
This is not an easy task, but it is possible. In order to become a successful
investor you have to acquire the education and practice. We at Yalicoo recommend
that you keep reading about the way
stocks are traded,
how to
choose the right ones and use
how
to use Yalicoo for practicing and improving your trading skills.
|
|