Stock brokers are as close as most people come to meeting a wizard in the modern day. These men and women in their serious suits and power ties not only understand the mechanics by which business and the economy work, but are able to grasp the helm and steer from time to time. That is power, and it’s a power that the average investor thinks is worlds away.
What if I told you it wasn’t? What if I told you that making money on the stock market is just a matter of careful research and quick action, with a little dash of luck? Well it is, and don’t let anyone tell you any different.
What Stocks Are
Jargon is the biggest hurdle to every new investor, particularly when it comes to those who want to invest in stocks. For that reason it’s important that before someone starts focusing on losses and gains, or the NASDAQ versus the NYSE, it’s important to understand what stocks really are and what they represent.
Put simply, stocks are a share in a company. If someone goes online and buys a share of Wal-Mart stock then that individual now has a stake in how well Wal-Mart does. If the company does well, the investor does well. If the company does poorly, then the investor can lose money. How much one stands to gain or lose depends on how much stock that person has in the company, and how that company performs.
Let’s use an example. Say that Company 123 wants to attract investors. As such it divides itself up into 500,000 shares of stock. For every person who buys stock, that money goes to the company so it can hire new employees, build new stores, and generally attempt to get a bigger share of the market. Seen this way it’s clear that trading stock is great for the company… but how do you, the investor, make money?
Method #1: Make Money Trading Stocks
Trading stocks is the most well-known way to make money on the stock market. It’s the method Hollywood has shown us a thousand times. You know the scene; men in shirtsleeves shouting and waving tickets as they buy or sell, with fortunes hanging in the balance with every second adding zero’s to the end of the dollar amount. It looks like chaos, but it’s actually pretty simple. More than simple, stock trading can be summed up in a single phrase; but low, sell high.
The price of a stock is liquid, climbing and falling within the space of days or even hours. The trick to make money as a trader is to buy the stock when its price is low, and to sell it when the price rises. So, say that a stock broker heard that Barnes and Noble is claiming a bigger part of the market and that it’s poised to rebound from a slump. He or she might buy stock at $5 a share, and wait. If the stock goes up then the broker can sell it at a profit. So if the stock climbs to $7.50 a share the broker has made a $2.50 per share profit. That’s not terribly impressive for a single share, but if the broker purchased 100 shares, or 1,000 shares then that profit is going to go up pretty quickly.
It doesn’t matter whether you hang onto a stock for an hour, a year, or a decade; if you sell it for more than you paid for it, you made a profit.
Method #2: Make Money From Stock Dividends
When someone is a stockholder in a company, that company’s profits are also the stockholder’s profits. The increasing value of a stock is just one instance of this. Another may be dividends paid to shareholders by the company. In plain English that means that every quarter the company will take a segment of its profits, split it up, and give those profits to stockholders according to how much stock someone has. The more profit the company makes, the more money the stockholder gets paid at the end of the quarter.
The ideal situation for you to be in is to hold stock in a company that pays dividends, and which is making record profits. If you hold onto that stock then as long as the company is making money, you’re making money. In essence you’re being paid to own the stock, because when you bought that stock you paid for a share of the company. That share of the company comes with your own little piece of the profits pie.
Can I Invest in Something Other Than Stocks?
Of course! The sky is the limit when it comes to investing, and there are all kinds of different vehicles for making your money grow. Buying stock is one option, but some investors prefer to bet on the foreign exchange markets. Others prefer to buy government bonds. Some prefer the stable payout of a CD or a savings account. It’s all up to you, and what amount of risk you’re comfortable with in your portfolio.
If you enjoyed this short guide on stocks and how they work, you might also enjoy this guide about binary options, and how you can make money with them.
“How Do I Actually Make Money From Buying Stocks?” by Joshua Kennon at About.com
“How Do Stocks Work?” by Anonymous at Liffe Investor