I’m sure you want to save for a better future. Everyone around you is telling you that you need to invest. They throw terms like “stocks, cryptocurrency, ETFs, bonds, and more” at you. But you don’t really know what these terms mean. What does investing actually mean and what is stock and what is the stock market?
In this article, we will mainly focus on the concept of shares and the stock market.
These are very technical terms. Something you have to mechanically memorize. And it’s not complicated. What is complicated afterward is actually learning how to invest and how to use the concept of stocks and the stock market.
What is stock?
Stocks are securities that confirm the share held in a company. Confirm that you own a piece of the company that issued the stock.
Now imagine your favorite company as a pie. The pie is divided into 8 pieces.
When you buy stock in your favorite company, you are essentially buying a piece of that company. Just like you’re buying a piece of that pie.
For real companies, this pie is divided into many more pieces. As many as we can’t even fit in this graphic. For large companies, even in the billions. As they have issued a very large amount of shares.
What is the Stock Market (Exchange)?
The stock market, on the other hand, is an exchange where investors and traders can sell or buy shares or other securities. A stock market is a place where you can buy that piece of pie or even sell it after a while.
Which isn’t exactly as easy as it may sound. You are essentially negotiating with the counterparty on the price at which you then execute the trade. It’s not that you always can sell the stock at the value it’s currently worth. At the same time, someone has to buy that share at the price you set.
You may have heard for example about NYSE — New York Stock Exchange, or NASDAQ. Where all trades take place physically. We are living in the 21st century so undoubtedly these stock markets also have their own digital data centers. Some have already shut down the physical trading floors.
However, the thing that we live in the 21st century does not change the fact that stock markets have their opening hours. This is a big difference from cryptocurrencies which you can trade (buy or sell) 24/7. Stocks can be bought or sold only when the stock market is open. This depends primarily on the country where the selected stock market is located. But as a rule, the stock market is always closed on weekends and holidays.
What are the benefits of investing in stocks?
By owning a share in the company, i.e. stocks of the company, you are essentially participating in the growth and profits of that company.
When the company you own shares in grows, so does your stock price. The price of your piece of the pie. You can also participate in the company’s profits paid out in the form of dividends.
Does it also mean that if I own one share of Facebook (Meta) I can go chat with Mark Zuckerberg?
Definitely not. By owning one share of Meta you have only a very small stake in the company. How small? Let’s do the math…
The market Cap of Meta at the moment is about $610.27B.The price of one share is $224.27. This means you own about nothing.
The main benefit is the possibility of a return. The main goal of any business is to generate profit, and we can participate in the profit by buying a share of the company.
What are the risks of investing in stocks?
Unfortunately as with the company’s growth and profits, the same is true the other way around. The value of stock also falls when the value of a company declines.
That is why there is a huge risk in stock trading and especially in investing in individual stocks involved — choosing individual companies and stocks to buy. Therefore, the recommendation for beginners is to invest rather in such pre-made packages of shares. In the form of ETFs and various other funds where you essentially buy shares in 500 or more different companies with the purchase of one share.
The price is determined mainly on the basis of supply and demand. So the price can change very quickly. Both positively and negatively. In an extreme case, the company may go bankrupt and stock investors will be left with 0.
Learning what is investing in stocks and how to invest in stocks can be hard. It’s about absorbing a lot of information. Only the basics of what stocks are have been covered in this article. There is much more beyond that.
The important thing is not to be afraid of risks and to start investing. You can pick some less risky “packages” of stocks and just go with that. However, before you start, you need to educate yourself thoroughly about stocks, determine what type of investor you want to be, what your investment goal is, what time horizon you want to invest in, and follow other basic investing habits and principles.