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Now that we’ve covered why you should be investing in the stock market, we’re going to show you how you can start doing it profitably.
It starts by getting to know the basics. After this lesson, you’ll be ready to talk stocks like a pro.
The first thing we want to cover is what exactly a stock is.
A stock is simply a stake a business. Each publicly traded business is divided up into thousands (often millions) of equally sized shares, with each company’s stock being labeled by a short stock ticker symbol. These are the all-caps labels you might see streaming across the bottom of a news program or in the newspaper’s business section. For instance, Microsoft Corp. trades under the ticker MSFT.
But not every ticker symbol flashing on the trading screen in a stock in a publicly traded company. There are several other types of securities you can trade alongside stocks.
Mutual funds, exchange traded funds (ETFs), real estate investment trusts (REITs), corporate and government bonds, and even contracts, like futures and options trade on public markets.
While many of these securities trade just like stocks, they work a bit differently.
Mutual funds and ETFs are like buying a basket filled with shares of all sorts of different companies and securities. Mutual funds are managed by a professoinal, using working for a bank or investment house, and have specific goals, like fast growth, stability, retirement by a certain date, or a mix of different approaches. Since they are actively managed, these funds charge a fee to the fund owners.
ETFs, on the other hand, are passively managed. They try to match a particular stock index, like the Dow Jones Industrial Average, by filling their basket with proportionate shares of each stock in the index. Owning an ETF is an easy way to match the market’s average return and since they’re passively managed, the fees are much lower than a mutual fund.
But your’e here because you wan to make money, not pay a Wall Street bank to give you an average return.
That’s why we’re going to focus on stocks in this module.
But it’s important to remember that investing isn’t just buying a ticker you like and waiting for the price to go up. When you buy stock in a company, you’re actually becoming a part owner of that company. And you want to own good companies that make money.
In fact, shareholders – those who own the company’s stock – make some of biggest decisions about the company, just like the owners of small, local businesses. Once you own shares of a company you’ll be sent details on the companys annual meetings and even get to vote on all sorts of compan business, from who to appoint to the board to executive compensation to which accounting firm the company should hire.
But the best part of being a shareholder is making money.
Just like owning any other kind of business, you tend to make more money as the company makes more money. That’s why it’s important to own shares in successful businesses with the potential to grow.
Plus, some company’s reward their shareholders directly. Dividends are payments made to shareholders. Not every company pays dividends, but stable and profitable companies often reward their shareholders with income. These can be paid quarterly or in special cases where the company has extra cash on hand, like after selling off a major asset.
But what makes a stock different than buying a local business down the street is that you can buy and sell shares of stocks on public exchanges.
These include public markets like the New York Stock Exchange (NYSE) or the Nasdaq exchange, plus other exchanges all across the world. These exchanges are what we call the stock market.
And because you can buy and sell stocks almost immediately, the price of stocks moves based on the performance of the business (and a few other reasons we’ll cover later). That’s a big reason why investing can be so lucrative.
Because stocks are bought and sold on a public market, the share price, or price of the stock, rises when more people want to own the company and falls when fewer people are interested. It’s no surprise businesses with growing profits, that are developing the latest tech breakthrough, or are dominating their market often see their share prices rise over time. More people want to own those companies and they’re willing to pay more money for them.
Owning the best companies with the highest potential to gain value over time is the trick to successful investing.
And we’ll show you how to do just that in the next lesson.