Investing: A Primer for BEGINNERS. Part 4
All You Really Need To Know About the STOCK MARKET
Many people are intimidated by the stock market. There's really
no need to be; it's quite simple.
Well, on the face of it, it's simple, but the deeper you go,
the more complex it becomes. In this article, we'll start with the
simple concepts, and leave the complex stuff for later
What is STOCK?
Let's start with an understanding of what stock
is. Simply put, when you buy a share of stock, you buy a share of
ownership in a company.
Businesses form corporations for legal reasons (for example,
there are lots of tax benefits available to corporations that
aren't available to individuals). There are several types of
corporations, from privately held corporations to limited
ownership corporations to publicly held corporations. We're
talking about the last type here.
When a company (corporation) decides it wants to expand and
needs a lot of money to finance the expansion, it will issue shares
of stock and sell these shares to the general public, in
what's called an initial public offering, or IPO.
Occasionally, they will issue additional stock after the IPO.
Regardless of when they are issued, each share of stock represents
one piece of ownership in the company.
Here let's look at some examples to see what we are talking
Let's say a very small company issues 1,000 shares of stock at
$100 per share. The original owner of the company retains 510
shares of stock for his own ownership position. That means he
would still own 51% of the company. That also means they would
sell 490 shares of stock, raising $49,000 for the company
Larger corporations have issued literally millions of shares of
stock. Sometimes a majority shareholder will own as few as 3% of
But the bottom line is that if you own even one share of stock
in a company, then you own a piece of that company.
What does stock ownership entitle you to?
When you own a share of stock, you can either keep it or sell
If you keep it, then you are entitled to participate in and
vote in stockholders' meetings. Most companies have a
stockholders' meeting annually. If you own shares of stock in a
company, they should send you an annual report and notice of
shareholder meetings. Most stockholders do not attend these
meetings, but instead vote for a proxy to represent them at the
Also, if you own stock, it entitles you to receive dividend
payments, if the company issues them.
Dividend payments occur when the company makes a significant
profit, and decides to distribute some of the profit to its
owners. Other companies do not offer dividends, instead choosing
to invest all profits into the expansion and improvement of the
That's about it. As a stockholder, you don't get to tell them
how to run the company, or to sell or buy equipment, or worry
about what products they make or services they render. All you can
do is vote in stockholder meetings.
What IS the Stock Market?
The stock market is a centralized location where people gather
to buy and sell stock.
Actually, there are several of these centralized locations
worldwide, the AMEX (American Stock Exchange), the NYSE (New York
Stock Exchange), the NASDAQ (National Association of Securities
Dealers Automated Quotations) and the international exchanges,
like the NISSEI in Tokyo.
You can read more about what the stock exchanges are at
When corporations issue an IPO, they will either register with
one of the major exchanges, or they will remain independent,
preferring that their stock be traded "Over The
Counter," as the NASDAQ does.
As far as beginning investors are concerned, you don't need to
worry too much about which exchange a stock is listed with,
because your broker will handle all the details.
Why Do I Need A Broker?
Individuals are not authorized or licensed to deal directly
with the exchanges, although in some cases you might be able to
purchase stock directly from a company.
Instead, you will need an authorized and licensed person to buy
and sell the stock for you. We will discuss brokers in a future
For now, all you need to know is that some brokers offer good
advice, some offer bad advice, some offer no advice at all. But
all of them charge for their services, usually a commission based
on the number of shares you trade, or the amount of money
Why do Investors Turn To The Stock Market?
The main reason investors turn so quickly to the stock market
is that it's so readily available. People know a lot about the
surface of the stock market, and it's in the news almost every
day. Rare is the person in the U.S. who hasn't heard of the stock
market crash of 1929, and how it heralded the beginning of the
The stock prices for most major corporations are readily
available daily, either on line or in any major newspaper.
People can easily make a purchase, easily follow how their
investment is doing, and easily get out of it when they want to
retrieve their money.
And mostly because it's easier to understand than most other
How Do You Make Money (Or Lose It) In The Stock Market?
This one's simple. To make money, buy low, sell high. To lose
it, buy high, sell low.
If you buy 100 shares of ABC stock at $10 a share, you would
spend $1,000. If a year from now you sold those 100 shares for $15
a share, you would realize $1,500 on the sale, for a $500 profit,
and a 50% return on your money (less the broker's
Of course, if it were that simple, everyone would be rich from
the stock market. As you have surmised, it's not that simple.
If you want to make money in the stock market, then you have to
learn something about the forces that make stock prices move. Your
goal, of course, is to purchase the stock when you think the price
is going to go up, and sell it before the price starts going down.
We will be getting into what these forces are in a future
article. and we will also talk about how to do analysis of
these forces, so you can at least have a fighting chance of making
money, not losing it.
What Other Things Do I Need To Consider When Investing In
The main thing to keep in mind is that when you make a trade
(buy or sell stock), you will usually pay a broker's
This is just one of the costs of doing business in the market,
and unless you go overboard in making trades, this expense won't
be too bad.
However, if you do go overboard, or if you have a disreputable
broker, then the brokers' commissions will eat up all your
profits, and probably even eat into your equity.
So don't let the fear of paying a broker's commission deter you
from making a trade you really feel is essential, but keep in mind
that if you trade too often, the commissions can become
What Causes Stock Prices To Change?
This question is more appropriate for an entirely separate
article, but let's cover the basics.
The ONLY thing that causes a stock price to
change is the law of supply and demand.
It's not (directly) the profitability of the company, the
honesty of its officers, the size or growth of the company, the
demand for its products -- none of this directly impacts the price
of a stock.
However, they can influence the demand for a
stock, and when the demand goes up, then so does the price.
Stock is a limited supply item. There's usually enough of it
floating around for any large corporation that you should be able
to buy it or sell it whenever you want. But when more people want
to buy it than sell, those who do have shares to sell can ask
higher prices. And get them.
And the reverse is also true.
If a large number of people want to sell a stock, and very few
want to buy it, then the price will come plummeting down as the
sellers compete with each other for the available buyers.
A vivid example of this is what happened to the stock market
immediately after September 11, 2001. To the right is a graph of
what the Intel Corporation (INTC) did in 2001.
Notice the nosedive the stock took in the September timeframe,
losing almost a third of its value. Many U.S. stocks exhibited
this same behavior. Why? It wasn't because they suddenly quit
operating, or suddenly had low profits or bad products, and it
wasn't because their officers suddenly became untrustworthy.
No, the only reason for the stock price nosedive in September
of 2001 is that investors suddenly wanted to get their money out
of the stock market. There were thousands, probably hundreds of
thousands more sellers than there were buyers.
When this happens, the law of supply and demand dictates the
prices will fall. And they did.
Any savvy investor with some cash to spare at this time, would
have waited until the price fall stopped and started back up, then
would have invested heavily in any reputable corporation.
From the chart above, you can see that Intel not only came
back, but came back to a higher level. That savvy investor would
have made 50% on his money in only a few short months.
To answer the main question of this section, "What causes
stock prices to change?" The main answer is Investor
Perceptions, and the technical answer is the law of supply
We will get more into this in a future article.
How Can I Be Sure I Make Money, Not Lose It?
Ah, yes. The quest of all investors. I'll address several
future articles to some things you can do to give yourself the
best chance of making money, and not losing it.
But as with all investments, you will always have an element of
risk, so be sure to always heed this advice: Never invest more
money than you can afford to lose.
That's enough for now. In the next part, we'll talk about some
of the types of analysis you can do, so you'll know
(more or less) what to expect from the stock market..
If you'd like to ask me a question, please use the Snicko
contact page. I read them all, and I'll try to answer the most
pertinent ones in this series of articles.
Take care, and God Bless,