The stock market can be scary for new investors, but it’s not quite as complex as the folks on Wall Street want to pretend it is. This brings us to the most basic question about the stock market: What is a stock? A stock is a share of a public company.
A Public Company
There a private companies and there are public companies. Private companies are owned by individuals or by other companies. Public companies are owned by, you guessed it, the public! This is a way to have multiple people contribute to a company financially.
Let’s say a company is just starting out and they need $100,000 to get started. They could raise the money on their own or they could go public. Let’s say the go public. Since they need $100,000, they start their stock price off at $100/share and offer 1,000 shares (100 x 1,000 = 100,000). Now if all of these 1,000 shares sell, the company will be fully funded and have their $100,000.
Once this company begins to earn profits, the profits could then be divided among the share holders. If they managed to make $100,000 profit in the first year, they could add $100 to the price of each share. Now all of the people that owned shares worth $100/each would own shares worth $200/each. That’s a nice profit! The company would also have the option of using that profit to re-invest in the company, pay dividends to shareholders or repurchase their own stock.
Repurchasing stock is where a company reduces the amount of shares by buying their own stock to destroy it, which decreases the total number of shares and that increases the value of the rest of the shares.
People used to have to go through an actual broker to buy any stock. They would call to place an order and it was a rather long process, but now it is easy to buy stocks online, by yourself. There many great companies like sharebuilder.com or usaa.com (my personal choice if you have military affiliation). Buying a stock is as simple as figuring out the stock ticker symbols (i.e. Walmart’s symbol is WMT) and placing an order for the amount of shares you want.
Generally you will have a money market account in your brokerage account to store the money that you use for purchasing stock, in other words, you generally buy stock with money from your brokerage account, not with your regular checking account or a credit card. It often takes 5-7 business days to have the money available to buy stock once you transfer it to your brokerage account.
Get out there and do your research. Educate yourself on the stock market and how to pick stocks. The stock market is a great place to invest, if you are smart about it and you know what you are doing. There are so many great books on investing in the stock market that I can’t name them all, but here are some great resources on investing in individual stocks to get you started:
A great workbook (probably the best) to get started:
Great Books on the stock market:
- The Intelligent Investor: The Definitive Book on Value Investing. A Book of Practical Counsel (Revised Edition)
- One Up On Wall Street: How To Use What You Already Know To Make Money In The Market
- Beating the Street
Open an IRA in 15 minutes or less with TD Ameritrade, where you can buy stocks, mutual funds, index funds and ETFs.