‘I want to invest, but I don’t understand the stock market’

Disclaimer: This is a long read. To get the gist in bite sizes, download and share our free guide here.

…You are not alone.

The stock market can be a confusing place sometimes. It can seem like so much is going on, with numbers and percentage points flying around. Here is the good news according to Warren Buffett, one of the most successful investors in the world:

“Success in investing is not a matter of IQ … what you need is the temperament to control the urges that get other people into trouble when investing.”

• In this article, we are going to break down all the complexities of the stock market for you so you can sound like one of the pros in no time. However, before we go into what the stock market is, here is what the stock market isn’t: The stock market is not a lottery and stocks are not lottery tickets – The stock market is the best pathway to building long term wealth. It is not instant.
• The stock market is not a guaranteed money-losing venture. There are risks involved, yes, but there are substantially more opportunities for great rewards.
• The stock market does not run on luck. It may be unpredictable but you can be calculated.

Having said that, these are the most important terms you need to know.

1. The Stock Market

The stock market is infact a market. The difference between the stock market and the markets and stores you are used to is the stock market where you buy and sell pieces of publicly-traded companies. These pieces are called stocks or shares. Like any market, whatever you buy on the stock market is yours, so if you buy a share of a company in the market you have in fact bought a part of that company. You can also purchase Exchange Traded Funds (ETFs) on stock exchanges.

2. An ETF

An Exchange Traded Funds (ETF) is collections of assets that you can buy into. The ETF already owns different assets so it exposes you to those assets at a significantly cheaper rate but with the same benefits of diversity and the same opportunity for returns. If you buy an ETF of the S&P 500 (More on the S&P 500 later), you will instantly give yourself a very diverse portfolio because that ETF exposes you to the 500 biggest stocks available.

3. A Stock Exchange

A stock exchange, sometimes called a securities exchange, is a physical location where investors can buy and sell shares and bonds and other financial instruments. In the U.S., the New York Stock Exchange (NYSE) and the Nasdaq are the two biggest stock exchanges.

4. A Ticker Symbol

A ticker symbol or stock symbol is an abbreviation used to uniquely identify shares of a particular publicly-traded company on a particular stock exchange. For example, Apple’s ticker symbol is AAPL. Since ticker symbols are commonly written alongside the stock exchange the shares are traded on, Apple can sometimes be referred to as NASDAQ: AAPL. 

5. A Stock Index

This is used to track the performance of a large group of stocks. An index can track the entire market like the Standard & Poor’s 500 Index (S&P 500) does with the U.S. markets 500 most valuable companies. It can also track a small segment of stock like The Dow Jones Industrial Average (DIJA) with the biggest 30 stocks in the market. Stock market indexes like the DIJA and the S&P 500 are often used as proxies for the overall market – that is, they are used to track the performance of the overall market. So, when you hear statements like “the market is up” or that a stock “beat the market”, they are often referring to the stock index. Investors use these indexes as a benchmark for their own portfolios, and also to inform their stock trading decisions. So kudos to you if your portfolio is doing better than the S&P 500 or the DIJA. If your portfolio isn’t, don’t get discouraged. Just keep on reading.

6. An Initial Public Offering (IPO)

This is the process by which a company sells its shares on the stock market for the first time.

7. Market Capitalization or Market Cap

It is simply how much a public traded company is worth. It is calculated by the current value of one share price by the whole number of the company’s shares.

How does the Stock Market work?

The stock market works through a network of exchanges like the New York Stock Exchange and the Nasdaq in the U.S and there are two parts: the primary market and the secondary market.

The primary market is where companies first sell their shares directly to investors through an IPO. At this point, companies do not typically sell shares to individual investors, but to major institutional investors like pension boards, hedge funds & mutual funds that manage money for large groups of people. This often enables the sale to go fairly quickly and allows the company to raise money to grow its business.

After the IPO, virtually all the subsequent stock trades take place between investors – the company is not involved at this stage. This is the secondary market. It is where individual investors can buy stock. So, if you want to purchase shares of Microsoft, for example, and you hit the “buy” button on Bamboo, you are buying shares that another investor has decided to sell – not from Microsoft itself.

Why do stock prices go up and down?

There are a whole lot of reasons why stock prices fluctuate in value. The media, opinions of analysts & well-known investors, political and social issues, economic conditions, are some of the factors that drive stock prices per time. The underlying reason, however, is the principle of supply and demand.

The stock price of Spotify, for instance, will climb high when there are more buyers than sellers. In reverse, the stock price will fall when there are more investors selling than there are buying.  It is important to say that a stock rising or falling is not a bad thing in and of itself. It is the natural way stocks move. What you want to be concerned about however is why the stock price is rising or falling.

When considering stocks to put money into, look at the actual business of the company. What does the company actually do? What does it make money from? Then look at the company’s competitors in that industry and how the company fares against its competitors. If the company does not have a form of competitive advantage in its field, you might want to reconsider buying its stock.

What is the best price to buy a stock?

The best answer to this question is that generally speaking there is no right price or right time to buy a stock. A stock price that is $100 today may seem expensive (even when you are buying a piece of the $100 through our fractional investing feature) but that $100 maybe $300 by next week. It may also be $80. That is why it is very important to understand the actual business of the company so you can feel comfortable and reassured when the price fluctuates. Remember, stocks are supposed to rise and fall so that they do not, should not worry you. All you have to do is ask why and on the stock information page on Bamboo, we have a section that tells you why a stock’s price is rising or falling.

Now you know…

Investing in stocks is one of the most effective ways to build long-term wealth when it is done right. With the right mindset and good knowledge, an investor can make great gains from the stock market. Remember the Warren Buffet quote we started out with?

“Success in investing is not a matter of IQ … what you need is the temperament to control the urges that get other people into trouble when investing.”

Want information to help you make smart investment decisions? Download the Bamboo 3 in 1 investment guide!

 

 

The above reflects the opinions of only the writers who are associated persons of Bamboo Systems & Technologies Ltd. and do not reflect the views of Bamboo Systems & Technologies Ltd. or any of its subsidiaries or affiliates. They are meant for informational purposes only. They are also not research reports. The third-party information provided therein does not reflect the views of Bamboo Systems & Technologies Ltd., or any of its subsidiaries or affiliates. All investments involve risk, and the past performance of a security or financial product does not guarantee future results or returns. Keep in mind that while diversification may help spread risk, it does not assure a profit or protect against loss. There is always the potential of losing money when you invest in securities or other financial products. Investors should consider their investment objectives and risks carefully before investing. The price of a given security may increase or decrease based on market conditions, and customers may lose money, including their original investment.