Written by experts Pat Collins and John Halloran.
The stock market: We hear about the stock market all the time, whether it be on the TV news, in a newspaper, on the radio, or on the internet. It seems that stock market information is everywhere, but what actually is the stock market, what stocks are traded on this market, and should I know or care about these headlines? When the stock market has ‘had a good day’, does that affect me, my employer, or my country’s economy?
We see news headlines like “U.S. stock futures rose, indicating indexes would open with gains”, “The S&P 500, Dow Jones, and NASDAQ were flat this week”, “The stock market reacts to news from Washington”, “Market’s biggest bull sees year-end rally”, and we wonder if anyone really knows what it all means.
Once we start thinking about what stocks actually are we discover the answers to the above questions are not that obvious. Perhaps you’ve heard that when you own stock you become an owner of that company. What exactly does that mean? Do I have the power to hire or fire people? As an owner, can I walk into an office of that company and take something I like, like a desk or a chair?
Obviously, you would own a very small percentage of that company if you only owned a few shares, but if you were a majority share holder does that mean you could hire and fire workers and take home a desk or chair?
These are all great questions and in this short tutorial we intend answering all of these questions, and will further explain some core concepts. Once you gain a clear understanding of these concepts and begin to understand how the stock market works, it’s our hope that you’ll become a smart, shrewd investor.
You may be thinking that you don’t have your own brokerage account and don’t invest your own money; however you could well be exposed to the stock market through your pension plan, your 401(k) retirement plan, health savings plan, college savings plan, or your insurance policies.
There was a time when the stock market was a rich persons’ tool, but today things have changed considerably – many sectors now look to the stock market as their vehicle of choice for growing their personal wealth. This is partly due to low-cost online brokerage services as well as advances in trading technology. Today, with just a click of a mouse, almost anyone can own stocks.
Before we begin, it’s imperative that you understand the difference between two of the more common purposes of the stock market, and these are investing and speculation.
With investing, your money is used for productive projects, like expansion, or growth. It could be investing in a new business idea, a new factory, or in research and development; all of these are done anticipating that the future worth of the startup, the factory, or the research and development will be more than your initial investment.
It also means that you have a strong belief in the business plan of the start-up, you believe in the expansion and future pay-off of the factory, and that you have a broad understanding of the research and development being carried out. In short, when you invest you’re making a rational decision with an eye to the future. Investing means your money will be used to increase value.
Speculation could quite easily be compared to gambling. As a speculator, you purchase something hoping that soon you’ll be able to sell it at a higher price than the purchase price. However, you don’t necessarily understand or even care why the price should go up. It could be that you heard a rumor, or perhaps you had a gut feeling, but either way you’re not really concerned about the whys and wherefores of the start-up, the factory expansion, or even the research and development.
Speculation should not be seen as a bad thing. Perhaps the main difference between investors and speculators is that speculators add liquidity to markets, and many speculators have been very successful. That being said, many smart investors have suffered huge financial losses through speculation.
Investors are typically in it for the long term, while speculators are more focused on the actual price and have shorter money-making timeframes.
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