So what are stocks? How it can lead someone to riches? How they works ? Well in this post, I ll try to clear the picture to the most extent. First things first,
What Is a Stock or Share?
When you buy a stock you’re buying a piece of the company. When a company needs to raise money, it issues shares. This is done through an initial public offering (IPO), in which the price of shares is set based how much the company is estimated to be worth, and how many shares are being issued. The company gets to keep the money raised to grow its business, while the shares (also called stocks) continue to trade on an exchange, such as the New York Stock Exchange.
Traders and investors continue to buy and sell the stock of the company on the exchange, although the company itself no longer receives any money from this type of trading. The company only receives money from the IPO.
Why Buy Shares?
Traders and investors continue to trade a company’s stock after the IPO because the estimated value of company changes over time. Investors can make or lose money depending on whether their perceptions are in agreement with “the market.” The market is the vast array of investors and traders who buy and sell the stock, pushing the price up or down.
Trying to predict which stock will rise or fall, and when, is very difficult. Over time stocks as a whole, which is why many investors choose to buy a basket of stocks in various sectors and hold them for the long-term. Investors who use this approach do not concern themselves with moment-to-moment fluctuations in stock prices. The ultimate goal of buying shares is to make money by buying stocks in companies you expect to do well, those whose perceived value (in the form of the share price) will rise.
Why Sell Shares?
For every stock transaction, there must be a buyer and a seller. When you buy 100 shares of stock someone else must sell it to you. Either buyers or sellers can be more aggressive than the other, pushing the price up or down.
When the price of a stock goes down, sellers are more aggressive because they are willing to sell at a lower and lower price. The buyers are also timid and only willing to buy at lower at lower prices. The price will continue to fall until the price reaches a point where buyers step in and become more aggressive and willing to buy at higher prices, pushing the price back up.
Investors don’t all have the same agenda, which leads traders to sell stocks at different times. One investor may hold stock that has grown significantly in price and sells to lock in that profit and extract the cash. Another trader may have bought at a higher price than the stock now sells for, putting the trader in a losing position. That trader may sell to keep the loss from getting bigger. Investors and traders may also sell because they believe a stock is going to go down, based on their research, and want to take their money out before it does.
The Bottom Line
Stocks are issued by companies to raise cash, and the stock then continues to trade on a exchange. Overall stocks have risen over the long-term, which makes owning shares attractive. There are also additional perks such as dividends (income), profit potential and voting rights. Share prices also fall, though, which is why investors typically choose to invest in a wide array of stocks, only risking a small percentage of their capital on each one. Shares can be bought or sold at any time, assuming there is enough volume available to complete the transaction, which means investors can cut losses or take profits whenever they wish.
So stocks can lead to riches if bought and sold with proper knowledge and technical analysis.
If the thought of investing in the stock market scares you, you aren’t alone. False promises and highly public stories of investors striking it rich or losing everything skew perceptions of the reality of the average investor. By understanding a little more about the stock market – and how the stock market works – you’ll likely find it isn’t as scary as you may think and that it’s a viable investment.
What Is a Stock or Share?
When you buy a stock you’re buying a piece of the company. When a company needs to raise money, it issues shares. This is done through an initial public offering (IPO), in which the price of shares is set based how much the company is estimated to be worth, and how many shares are being issued. The company gets to keep the money raised to grow its business, while the shares (also called stocks) continue to trade on an exchange, such as the New York Stock Exchange (NYSE).