Because the stock market is confusing!
Before I started investing in the stock market i had literally no clue how it worked, i didn’t understand what the stock market was or how to buy a share.
Now that I have learned the ins-and-outs of the stock market from countless amazing investors and my own mistakes I take these basics for granted and forget how confusing it all was at the start.
In this post I am going to breeze over the basics and hopefully after reading it you will have a slightly clearer picture of what the stock market is and how it works.
– What is a share?
If the ownership of a business was represented as a pizza and it was owned buy 1 person, it would be a fresh out the oven whole pizza. Now lets say this business is doing well and this owner wants to grow the pizza further, what should they do?
One option is to slice that pizza up and sell some of the delicious slices in order to raise some cash but this means the pizza will be owned by more than one person – each person has a share of the ownership of the piz….business.
Owning Tesco shares would mean you literally own a piece of Tesco the business.
– What is the stock market?
The stock market is hugely complex but at the same time simple, its where shares are bought and sold between investors.
When a business has shares available to be bought or sold by the public this is done with the magic of the stock market. Many people find it hard to believe that when you buy a share, you are buying it from another person who wants to sell that same share.
The stock market facilitates my purchase by matching my order to ‘buy’ with another trader’s ‘sell’. In that way it’s kinda like ebay for shares!
– How do you buy and sell shares?
Buying a share isn’t as simple as popping down to the London Stock Exchange and asking the first person you find to give you £1,000 worth of Apple shares.
It’s a good job it isn’t as i would have spent a fortune on train tickets by now! Buying shares do incur a cost however and this cost is due to the need for a middle man.
In order to buy shares you need a Stock Broker, hopefully you will have heard this term before. Think of your stock broker as a go between that has the necessary connections to place orders at the stock exchange on your behalf.
More on the exact steps to buy your first share in a future post so keep your eyes peeled or better yet join the mailing list so you don’t miss it!
– How do share prices change?
Share prices fluctuate constantly, they can change depending on news, data, business performance reports or sometimes, for no reason at all!
The actual mechanism that moves the price is complex but basically down to supply and demand.
If a share is popular and has lots of ‘buy’ orders and a relatively low amount of ‘sell’ orders there is more ‘demand’ than ‘supply’ and the price will rise to find a balance between the two.
The exact same is true of the reverse, if there are more people wishing to sell a share than buy then the price drops, simple!
– How do you make money in the stock market?
The stock market can be unforgiving and many people you talk to about it may have a sour taste in their mouth from any experience they have had previously.
So many people picture themselves with 4 screens tracking prices, placing orders left right and centre – “buy, buy, buy!” – “sell, sell, sell” – and the balance in their trading account growing exponentially!
This is not what being successful in the stock market looks like. Making money in the stock market takes time.
The two main ways you will make money in the stock market are:
- Capital Appreciation (fancy way of saying the price goes up)
- Dividend Income (spare cash the business you owns may chuck your way)
The first boils down to the good old fashioned ‘buy low, sell high’.
The second approach is investing in businesses that pay a dividend and re-investing that cash into buying more shares in order to receive more dividends in future!
In my approach to investing I tend to go for a nice balance of the two.
– Want to learn more?
This has been a brief overview of the mechanics of the stock market.
For more, including investing strategies, how i evaluate businesses and build successful portfolios, make sure to subscribe to the mailing list below.
My aim in creating Investing Smart is to help educate new and existing investors of the ways to generate more money and invest to become financially free
Check out my last post covering some of the basic investing terms as this is an excellent follow on from this post.
Have an awesome day, go crush it!