Nov 18

I was wondering what exactly the stock market is and if it can be beneficial to me?

 

You are the CEO of a brand new corporation, and you need money.  How are you going to get money to run your business?  Well, if you are like most CEO’s you’ll seek out investors.  Investors give the CEO money, and the CEO repays the money that the investor gave with interest.  So, Investors give their money to the company to make money for themselves. 

 

Stocks are a way for CEO’s to get money.  Investors (people who buy stocks) give their money for ownership in the company.  Each stock is a portion of company ownership. 

 

Scenario:

You are the CEO of Movie Pop Star Corporation.  And you need $1 million to expand your company.  So you decide to issue stock to make that $1 million.  So you issue 20,000 stocks at $50 each.  I am an investor, and think your company is a stellar winner!  I am so excited about your corporation and see a potential to make a profit off of owning a portion of your company, so I buy some stock.  I buy 200 stocks at $50 each for a total $10,000.  I now own 1% of your corporation (200 stocks divided by 20,000).

 

I as an investor want to buy stocks when the price is low and resell them when the price goes up again.  For example, I bought the Movie Pop Star Corp. stocks for $50 each, so I will hold the stocks for a while until I see an opportunity to sell.  Let’s say the stock value moved to $75 per stock and I sell my ownership (stocks) then…I would make $5,000 ($25 times 200). 

 

Someone can make a lot of money buying and selling stock, but you can also loose money.  Like most things in life, markets go up and down in cycles over time. 

 

Let’s say the Movie Pop Star Corp. stocks lost value and went down to $10 each.  I have a potential loss of $3,000, which would be horrible.  But there is no real loss until I sell lower than what I bought it for.  If I hold the stocks I still own 1% of the company and have 200 stocks.  The trick is knowing when to sell and cut losses if the company is going bankrupt and when to hold knowing the company will get back on it’s feet to become profitable again. 

 

Short Version:

  1. Stocks are a way for companies to get money.
  2. When you buy stocks you are buying ownership in the company.
  3. Buy low sell high.
  4. Research the company before you buy.
  5. You can gain money or loose money in the stock market.