- How To Invest In Stock?
- What exactly is a stock?
- How does the stock market work?
- How to buy a stock?
- How to find good stocks that will earn you money?
The stock market is hitting a record high. People who have invested at the bottom of this crash doubled or, in some cases, tripled their money. Think about it, it took you ten years to save100 thousand dollars, and you had the opportunity to save yourself 20 years and triple your money in just 5 months. I am not even exaggerating! the exact sameTesla stock that used to cost 500 dollars 6 months ago now worth over 1500 dollars. However, a lot of people missed this opportunity, which comes once in a decade, simply because they don’t know enough about the stock market.
Stock Market For Absolute Beginners Here is a simple way to understand the stock market. Suppose you come up with an idea of selling stuff online. You hire a bunch of developers to build the website for you. For the sake of simplification, let’s say you decide to name your website amazon.com. Its a simple and creative name that accidentally crossed your mind.
To make things easier, let’s say you start selling books. Lucky for you, business is going awesome, but you have a problem. You are making money but not enough to expand faster. Theoretically, you can start selling everything on your website, from electronics to kitchen equipment but you need the capital to rent a place and build your infrastructure.
If you are not going to do that your competitor might take advantage of that and will crash you. But don’t worry. Here is a brilliant idea. You can sell a portion of your company and use that money to expand your business. Lets your company is valued at 100 million dollars. Divide your company into 1 million stocks, with each stock priced at 100 dollars.
Let’s say you could convince an investor to buy a hundred thousand stocks for 10 million dollars. Congrats! Now you have the money to expand your business and that investor gets a 10 percent stake in your valuable business. You are doing great, your business is growing fast, but you want to expand even further. Since you have made a name for yourself there are tons of people in the country or even worldwide who want to buy a small piece of your company.
But you can’t simply sell pieces of your company from your office. You need to list your company in a place called- the stock market. Its a market for companies where people come to buy and sell small portions of the companies called stocks such as the New York Stock Exchange or the Nasdaq. Since you own 90 percent of your company, let’s say you list 200 thousand stocks on sale in the market and raise millions to expand.
Of course, we have oversimplified everything here, but that is a general idea. But most of the stocks in the stock market are not sold by the companies directly, but rather by people who have purchased them when the company listed their stocks for the first time, that’s known as IPO – initial public offering. If you hit the stock market to buy some apple stock, you probably won’t be buying them from Apple directly, but from someone else who owns a bunch of them and wants to sell them, Maybe he purchased them last year, and the price has doubled since then, and now he wants to sell them to make a profit.
Broker – The middleman you need.
Unfortunately, you can’t get into your car, drive to the stock market, find an apple store, and buy some Apple shares. That’s not how it works. You need the middleman who has a relationship with the stock exchange market – they are known as Brokers- it can either be an individual, or a firm or even your local bank. It’s pretty much like real estate.
You can’t purchase a house directly from the previous owner. You need someone who is licensed to buy or sell real estate, such as a real estate agent. So if you want to buy Apple, Amazon, or whatever shares from the stock market, you need to find a broker. Usually, they have to get paid for their hard work for helping you to buy or sell stocks by charging you a small commission fee.
it could be a fixed amount per trade or a fixed percentage of the total trade. Most banks today also provide such a service, but recently there has been a lot of innovation in this industry. In 2013, two guys from California launched an app called Robinhood, a broker agency that made buying and selling stocks possible from the comfort of your smartphone. The best part of it is that it’s completely free.
How do you make money in the stock market?
Now, since you know what exactly is a stock, and how to buy one. You are probably wondering why you should buy stocks at all? I mean, why would you give the money you have earned with blood and sweat to these multi-billion dollar corporations that make so much money that they can buy entire countries. Well, let’s say hypothetically company A produces and sells cars and has a total number of 1000 shares, where each share costs 100 dollars.
So the total value of the entire company is100,000 dollars. If let’s say next year company A builds another factory, hires more people, and eventually sells more cars, the company’s total value will rise, let’s say to 130K dollars. But since the company consists of 1000 stocks where each cost 100 dollars, individually each stock will increase by 30 dollars since the company as a whole rose by 30 percent.
So if you have purchased one stock from the company last year for 100 dollars, today it would worth 130 dollars, you can sell it make a profit of 30 dollars. In other words, when you are investing in the stock market, you are buying portions of businesses, which are called stocks, and these businesses grow, so the value of your stock. But you may wonder if by buying a stock I become the owner of a certain portion of the company, shouldn’t they share with me the profits the company makes.
Yes, they have to! They are known as dividends. Apple, for example, paid a dividend of over 3 dollars for each stock last year.
Why do stock prices change?
By now, you probably think that, instead of saving money, I can buy stocks, and my wealth will grow. Theoretically yeah! One of the companies that grew really fast in the recent decade was apple since iPhone sales were increasing year after year. In 2014 a single apple stock use to cost around100 dollars. Six years later as the company kept expanding and intruding on more products and increasing its sales, the stock price rose to 379 at the time of my writing this script. In other words, your 100 dollars invested in Apple would worth 379 dollars.
When you buy a single share, it doesn’t make a big difference. But let’s say you have invested 100 thousand dollars, your investment would worth 379K dollars, you have more than tripled your investment in just six years. But before you throw your money into the stock market because it looks so easy, hear me out because there is a catch. Not everything is sunshine and rainbows.
Because these stocks are listed on the public exchange, the numbers of factors that influence the price of the stock are too many and often, the price of the stock doesn’t represent the real value of the company. Let’s say hypothetically. There is an electric car company that gets a lot of hype around it. For the sake of simplicity, let’s call itself.
The company might generate a lot of hype around because its CEO is a marketing genius. A lot of people might get excited and start purchasing Tesla stocks, and according to the laws of economics, when the demand outweighs the supply, the price increases. The price might double or triple in a matter of a few months, but its real value didn’t double or triple. The demand artificially increased it. In the last six months, Tesla stock increased from around 500 dollars to 1500 dollars.
Tesla is a great company and doing great things, and it will probably be super-profitable sometime in the future but from an investment point of view, the stock price today doesn’t represent the value of the company which means its overvalued which means sooner or later, the price will fall to its true value.
As an investor, you either want to buy stocks of companies that represent their true value or stocks that are undervalued because of both will rise in the future. Of course, that’s not an easy job. You have analysis companies, read their financial statements, assess their business models, and make rational decisions based on facts and numbers, which is what we teach here on this blog.