Thinking about investing but have no idea where to start? Then you must read this to find out the basics of stocks and the stock market.
Investing Is Not Saving, Or Trading
Investments are things we are told we should buy but what exactly is one? According to the dictionary an investment is something purchased today but not consumed immediately with the intent of creating wealth in the future. In terms of personal finance this could be as simple as purchasing a CD (certificate of deposit) or buying stocks or bonds to funding new or fledgling businesses for the purpose of creating cash flow and/or capital appreciation.
Savings accounts are not to be confused with investing. Saving accounts are cash accounts with a bank or other financial institution that pay a small amount interest while. An nvestment is ownership in a business or other investment vehicle with the goal of increasing its value or producing income. Savings accounts are backed by depositor insurance and are among the safest methods for holding money. Investments tend to be much riskier and are not usually backed by insurance.
In today’s environment savings accounts return less than 1%. Money market accounts and Certificates of Deposit are other forms of savings that come with slightly more risk without giving up liquidity and yield slightly more than a typical savings account. The main difference between them is that money market accounts and CD’s require higher deposits and often come with term limits, usually in the range of 1 to 24 months.
Investments and investing should also not be confused with trading or speculation which is essentially gambling on the financial markets. While it can be said that purchasing an investment is a “trade”, investments typically are long term endeavors lasting months, years and even decades. A trade or speculation is a short term investment intended to capture profits through the day to day movement of the financial markets. They can last as short a time as a few minutes (scalping) up to several days, weeks or months depending on the asset in question and the anticipated move in prices.
The Basics Of Stocks And The Stock Market
Stock is the most common form of investment and represents a share of ownership in a company, fund or other equity investment. When a corporation is formed its value is divided into shares of stock and the shares are distributed among the company’s owners. Owners receive shares in proportion to their stake in the underlying company. Each share entitles the owner to a say in how the company is operated, typically in the form of voting rights, as well as a share in the company’s assets, equity, earnings and profits.
- What is equity and what are equities? Equity is the value of your investment or asset. In terms of a house equity is the amount of value attributable to the owner after all liabilities (mortgages) are taken care of. In terms of the stock market equity is the value of a company and/or the value an investors share of the underlying asset. The term can also be used to refer to a class of assets such as stocks, commodities, mutual funds and other. In essence, any investment you make in which you get something tangible in return such as shares of stock.
Stock is issued by both private and public companies; private company stock is usually held by only a few people while publicly traded companies are owned by many investors. Businesses can raise money by selling shares to private individuals (privately held corporations) or on the open market (publicly held). Private companies can choose to go public through what is called an IPO (initial public offering), at such time the stock is listed on an exchange and made available for public purchase.
Stock is bought and sold on an exchange. An exchange is a third party venue, either physical or on-line, that provides a safe place for traders and investors to buy and sell stock. The exchange does not participate in your transactions other than as a facilitator. When you buy, you buy from another investor, when you sell you sell to another investor.
Brokers are the most common way in which the average investor can access the market. Brokers are licensed and regulated businesses whose job it is to connect buyers and sellers of stock. Brokers provide access to the exchange which in modern times includes dozens of exchanges around the world. Brokers will charge you a fee, commission, for each trade you make.
Market Makers are designated business and/or broker/dealers who accept the risk of holding stock for the purpose of facilitating liquid trading in an asset. The market maker is required to buy or sell stock at any time and may do so in two ways; either selling or buying the stock in his own account or by matching your order with a corresponding and off-setting order.
There are two goals to investing, capital appreciation and cash flow. Capital appreciation occurs when your investment gains value. Cash flow is the amount of income paid to the owner of an investment and can be in the form of cash distributions, dividends and interest payments. Not all investments provide cash flow but all are intended to produce at least some form of capital gain.