Before you start investing in stocks, it is a good idea to keep yourself informed and know how the stock market works. Many people these days take the risks and don’t think about reading up nor learning about stocks prior to investing. There are many risks associated with the stock market. Sure, there are huge gains and you could get lucky if the market weighs within your favor. However, if it decides to crash suddenly you can lose all of your investments. It’s a gamble, you are basically betting on whether or not the company you have invested in is going to be profitable and cause the stock price to increase so that you may sell it for more than you bought it for. Sounds simple doesn’t it? But it really isn’t that simple. If it was, everyone would be rich today.
This game used to be for the rich who had extra money to spend but now a majority of the population have hopped on for the hopes of “getting rich quick.” If you plan to get into the stock market and attempt to get rich this way, good luck. I asked one of my friends yesterday since he had just recently invested $400 worth of Bombardier shares. I asked him, “How much do you know about stocks? Did you read up about it before you started investing?” He replied, “No, not at all.” Basically, he received a hot tip from another friend who hyped it up so much and persuaded him to buy Bombardier stocks. He had said, “Buy Bombardier shares guys! You won’t regret it, they will be having a new product launch event soon. Once that happens, the stock prices are going to soar!!” I was tempted, I won’t lie. But I wasn’t ready to take the risk just yet. I knew nothing about the stock market and I wasn’t about to invest in it based on a hot tip from a gambling addict. Bombardier is a huge company but the shares are under $5 so they are now considered a penny stock and penny stocks are considered the riskiest type of stocks. Penny stocks again, are usually start-up companies or companies on the brink of bankruptcy. If my friend did get rich off of the stocks, good for him. But I’m not the type to take risks like that until I am fully knowledgeable about what I am putting my money in.
So what are stocks anyways? Companies go public and issue stocks when they need funding for expansion, research, projects and so on. Companies can either issue bonds (debt) or stocks (equity) to raise money. The difference between these two are that bonds are money borrowed that accrues interest that guarantees the return of your money (principal) along with the promised interest payments. Stocks are the selling of part of the company in the hopes of the company becoming successful and the stock prices appreciating. Investors fund the company by buying a certain number of stocks, the more shares you own the more profits (dividends) you are entitled to. However, take note that not all companies pay out dividends. If the company goes bankrupt and liquidates, you receive a claim on assets after the creditors, bondholders and preferred shareholders have been paid out (absolute priority). You don’t exactly have a say in directly managing the company but you do get one vote per share when it comes to electing the Board of Directors if you buy common stocks (higher returns but riskier). As for preferred stocks they are guarantee the investor fixed dividend forever and may be callable at any time (company has option to buy back shares usually at a premium).
The stock prices are volatile, they depend on the supply and demand of the market. It is simple economics, if more people want it the price will rise. If demand is lower the price will fall. Also, the value of a company is represented by its market capitalization (stock price x # shares outstanding). The earnings of the company every quarter (4 times a year) also indicates how well the company is doing. Therefore, it is especially important to understand how to read financial statements. The first time a company goes public, they will issue an IPO (initial price offering) which let me just mention is nearly impossible to get your hands on unless you are from the inside or you know people. Examples of private companies that have no yet gone public are Airbnb and Uber.
You might have heard the term “bull” and “bear” market. “Bull” market refers to when the economy is good, unemployment is low, GDP is high and stocks rising. “Bear” market is the opposite. When the market is low, you can make money when the stocks are falling by short selling or wait until a bull market starts. People who invest in stocks who don’t learn anything about the market before getting into it are called “pigs.” They are generally high-risk investors.
All of this information was paraphrased off Investopedia. None of this material is owned by me and I take no credit from it, make sure to check out the link below for a more detailed explanation of stocks. Invest in your own self-knowledge before you get into anything! It is very important otherwise you never know what you can get into. Don’t just buy stocks because you heard of a “hot tip” from someone. How credible is this person anyway? The stock market is unpredictable. You can use charts, formulas, analysis of the past and ratios to try to predict stock performance but no one really knows for sure what makes these stock prices change.
I can’t stress this enough, do your due diligence! It is better to be safe than sorry. Never invest in anything until you fully understand it, it’s like diving into a pool without knowing how to swim.