It is common to find on many television presentation, bill boards, and newspapers and on the internet almost everywhere people talking about stocks or stocks markets rising or stocks falling. The questions people often ask; what are stocks? What is a stock market? Why is the stock market not stable? How can one invest in the stock market? Is it a lucrative form of business? Can one gain financial stability just by investing in the market? Can one invest from home or one need to be in the United States to invest? We are going to attempt to answer all these questions and throw more light on many other principles on which the stock market operates.
What is the 'Stock Market?'
The stock market, also known as equity market is a complex market system in which shares of publicly held companies are issued and traded (bought and sold) either via exchanges or over the counter. This provides companies with capital in exchange for a slice of ownership (share) in the company. It makes it possible for investors to grow a small initial sum of money into large ones, without making the sacrifice and taking risk of starting a business or that which often accompany a high-paying job.
How The Stock Market Does Operates?
The stock market gives investors the advantages to participate in the financial achievements of companies whose shares they acquired. i.e when the companies are profitable, investors make money through the dividends the companies pay out after selling appreciated stocks at a profit. Just like any other business, the investors can lose money when the companies whose share they hold have it's stock’s prices go down and they sell the stocks at a loss.
Stocks are traded through exchange that is one investor offer to sells a particular share, some other investor buys it. One of these two investors (not both) will make a loss and the other a gain. Therefore, it’s important to become well informed on the market technicalities and the risks involved before considering investment.
The three largest stock exchanges in the U.S. are the New York Stock Exchange (NYSE), created in 1792 and the NASDAQ, created in 1971 and America Stock Exchange (AMEX).
Nowadays, most stock market transactions are executed electronically, and even the stocks are almost always held in electronic form. You do not have to travel to New York to visit the NYSE. You can call a stock broker who does business with the NYSE, or you can open a low-cost brokerage account online, at sites like FOREX Trading. You can move money electronically into your account and start stock trading. Most discount broker sites charge a set fee of in the form of brokerage commissions, and many brokerage firms’ charge account maintenance fees as well.
There are two types of returns that an investor can expect to earn from an investment.
This is a periodic cash flow generated by an investment and includes dividends paid on ordinary shares and periodic interest paid on bonds. Dividends on Stocks are usually distributed quarterly. Debentures pay interest monthly, quarterly, semi-annually or annually and Government bonds pay interest on a semi-annual basis. Thus, investors whose primary goal is to generate periodic income from their investments focus on income return.
This is the increase or decrease in price of the stock in relation to the purchase price or the market price in the previous time period. An increase in the price of the stock is called a capital gain while a decrease is called a capital loss. The prices of stocks such as bonds, gold, and real estate fluctuate in response to a variety of factors such as industry conditions, economic news, company`s performance, political conditions, or even speculation. While the investors pray for a capital gain, there is no guarantee that price will always increase. Those investors whose primary investment goal is capital appreciation focus on the price change component of return.
Advantages and Disadvantages of the Stock Market
Risking personal finance for a potential gain is a big step for some individuals. Investors taking this risk often use their personal, hard earned money to invest in the stock market. The stock market (simply put) is an exchange place where investors (buyers and sellers) meet to buy and sell shares. Generally, the stock market has witnessed positive returns over the years, although there are advantages and disadvantages of investing in the stock market.
Return on Investment
Returns from stock market investments generally offer many other types of investments. . Placing your personal money in the stock market gives you the opportunity to grow your money over the long-term. Many well-established companies pay dividends to investors, which add your overall return on investment.
Investing in the stock market by buying of shares is one of the easiest ways to become a minority owner within a company. When you buy shares of a company’s stock (you become a shareholder), that makes you a part owner in the business. Although ownership percentage is relatively small, you are endowed with voting right on certain business decisions and corporate leadership. Unlike some other types of businesses, you can easily exit out of your ownership stake by simply selling the shares to someone else desiring to invest in the stock market
Once you purchased a share, you become a shareholder and enjoy all the benefits of a shareholder. You have a say in the affairs of the company. One of which is the right to vote in annual and Extra-ordinary general meetings of the company, right to be voted in any administrative position, the rights to sack erring directors, etc. Shareholders do not necessarily need to be present physically at the company's annual meeting in order to exercise these rights. It is common for them to voice their vote by proxy by mailing in their response.
There are millions of stocks available in the market today. With effective research and analysis of the stocks and companies performance, any investor with sufficient capital can acquire ownership of stocks except some specific stocks.
A rights issue is an invitation to existing shareholders to purchase additional new shares in the company. This type of issue provides existing shareholders securities called "rights" and advantages. The shareholders have the chance to purchase new shares at a discounted price to the market price on a stated future date. Each shareholder is provided the option to purchase a number of shares in relation to the number of shares already held. This increases the firm`s outstanding number of shares.
Another advantage of investing in shares is that it is a liquid stock. The stocks traded in the market also have greater liquidity (meaning it can be easily converted into cash by selling the equities to other traders in the market) than other securities. Compare this to selling real estate, where you may have only 1 or 2 interested buyers.
Ease of diversification
This simply means not putting all your eggs in one basket. If you carryout smaller investment in various different companies, the effect that one of your investments fails may have only a small effect on your total investment. You can buy a small fraction of shares ($500 is the minimum per fraction), doing this you can get greater diversification through investing in shares as opposed to say property where a huge sum of money is placed in just one investment
Availability of information
Information about a particular company’s shares is just about everywhere on newspapers, TVs and most financial websites. Therefore you are always equipped with the right information to make an informed decision on your investment.
Other advantages of investing in the stock market include:
Stocks have consistently stayed ahead of the inflation rate. This is something that is not always the case of bonds and other fixed income investments. For example, if someone money market is yielding 4% a year, but inflation is 5%, this means he is actually losing money. The returns of the stock market give investors the opportunity of staying ahead of inflation.
Stocks can be an excellent choice for retirement, especially for those with a long time to retirement. The longer your time horizon, the more valuable stocks can be. A long time horizon will help you to map out the inevitable ups and downs of the market and can better decide when to exit the market..
Disadvantages of investing in the stock market include
Subject to Higher Risk
The higher the expected return on investment, the greater the risk of losing money. Stock prices are generally linked to the issuing company’s earnings thus if the company is experiencing monitory difficulties, the stock prices decline rapidly. Stock market volatility can lead to a substantial loss of investment. If a substantial fraction of the market is experiencing financial difficulties and leaving the market because of economic factors, you may find it difficult to sell your share to someone.
Investing in the stock market is not like pushing the buttons and the bell rings. You need to carryout proper research and investment analysis to find the potential profitable stock. . For most people, investing in the stock market is a time-consuming, complex task. Even after finding a stock to buy, you must monitor the stock’s price movement. Although many investors implement a buy and hold long-term strategy, it is important to know when to exit the stock position when it turns out to be a bad investment.
Risk of Banking Crisis
There is the risk of bank crisis and credit crunch. If this was to occur there is a big chance of global recession and a big crash in the market to the one we saw in 2008-09.
The stock markets have seen many cases of corrections and crashes since they began. If it is not banking crisis, there will be some other reason causing the market to crash (they are a part of investing and the characteristics of the stock market).
Stocks are a volatile investment that is the price of a single stock can fluctuates quite widely from one day to another, and the factors that cause these fluctuations are beyond the control of the investor.
The process of buying and selling of stocks usually costs money in the form of brokerage commissions, and often times brokerage charge for account maintenance fees as well. Thus it is important to search for low cost alternatives when buying and selling stocks
The volatile nature of stock prices is a heavy downside for investors. Market prices are difficult to predict therefore it mostly relies on chance. For those who invest in stocks, it required years of experience and training to become a better trader.
Investors near retirement should reduce the amount of stocks in their portfolio. This is due to the fact that they cannot take chances with their money and that means moving a large portion of their retirement funds to a safer and more stable investment not in the stock market.
The stock market can be somewhat intimidating, but a little information can help ease your fears. It is not a gambling game where one either wins and makes profit or loses all his investment. In the stock market, even losers go home with a fraction of theirs i.e. nobody ever losses all his investment. If by chance you want to know how the stock market is performing at any given time, you can consult a stock index for the whole market or for a part of the market. Examples include the NASDAG index, Russell 2000, Stanley Europe, Standard and Poor’s 500, and Morgan, Australasia and Far East index.