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Welcome to the investing in the stock market
for beginners series! Today you are going to learn how the stock
market works! Welcome to episode one of investing in the
stock market for beginners series. This series is divided into five episodes,
which are How the stock market works, Different profits and compounding, Risks & diversification,
Financial ratios and Making your first investment. Don’t miss any episode by subscribing! Let’s begin with why you should start investing
in the stock market? Investing in the stock market is an easy way
to start building your asset column. You can start investing with just a couple
dollars. While it has it risks, it is shown that in
the long run stocks generate the best investment returns. And it isn’t as hard and terrifying as you
might think now! Before we get into how the stock market works,
let’s first define what a stock is. Stocks, or shares of company represent ownership
equity in the company. They give shareholders rights like voting,
and claiming earnings, like dividends for example. Let’s imagine it’s your birthday and you
have baked a cake. This cake represents a company. Now you cut the cake to 10 different pieces. These 10 pieces represent a share. First, you were the only cake owner, but now
10 people own your cake! Piece of cake right? Let’s now imagine that your friend Jon takes
two pieces of the cake. Now Jon owns 20% of the cake. Same goes for a company. If there is 10 shares, and you own 2 of them,
you own 20% of the company. There are two main types of stock – common
and preferred. The difference is that common shares usually
have voting rights, when preferred shares usually don’t have voting rights. Usually common stocks have equal shares, 1
vote for each share. This is not always the case, the stocks can
have different classes, like class A and class B. Let’s say our company is called Orange. The share Orange A has 2 votes for each share. The share Orange B has 1 vote for each share. So let’s say you have 10 Orange B shares. This equals to 10 votes. When you own 10 Orange A shares, you have
20 votes. But why is there different kind of stocks? Well, one reason for different classes is
for example that if you want to sell over 50% of your company, you can still have the
power on deciding things, because you have more votes. Because preferred stocks don’t usually have
voting rights, they have a higher claim to dividends or asset distribution than common
stocks. Why do companies issue shares? Companies need capital to work. Offices, employees, equipment and so on are
not free. One way to fund these would be debt, but some
companies choose to sell their shares for investors in the stock market. Let’s say our company Orange has 100 shares,
and one share is valued 10 dollars. When we sell these shares to investors, the
company gets 1000 dollars capital to use. But how can a company start selling their
shares? This is where the stock market kicks in. IPO stands for Initial public offering. This is how a company starts selling shares
to the public. This changes the company from a private firm
to a publicly traded company. Once the company’s shares are listed on
a stock exchange and the trading starts, the price of the share changes as investors value
the price of the share. There are different financial ratios that
investors use to value the companies, the most important financial ratios will be shown
later in the episode 4 of the series. Let’s now move on to how does the stock
market work? Back in the day stock trades took a place
in a physical marketplace. Now the Stock market works electronically
through a huge global network. Online stockbrokers are used to buy the stocks,
buyers offer the amount that they are willing to pay. For a trade to happen, somebody has to sell
the stocks for the price somebody is offering. It is important to note, that the company
doesn’t buy or sell their own shares on a regular basis. It’s the investors that trade between each
other. This means that companies only receive profits
from the Initial public offering, or when they occasionally sell more of their shares. It is the investors that make the profits
with trades after that. The stock market kinda works like a normal
market. It’s where buyers and sellers negotiate
the prices and make trades. The price of the stock depends on the buyers
and the sellers. When people see potential in a company, they
will buy the share. When more people want to buy the share, the
demand rises, and so does the price of the share. Same goes the other way around, when people
don’t see potential in the company, they start to sell their shares. Now the demand isn’t as high as before,
which makes the price of the stock fall. The changes in prices are represented in stock
indexes. Stock indexes gather together prices of many
different stocks, and the movement of an index is the net effect of the movement of each
individual company. People often talk about stock markets, when
in fact they are referring to stock indexes. Some of the most known stock indexes are the
Dow Jones Industrial Average and S&P 500. For example S&P 500 shows how the prices of
the 500 largest market value US companies have changed. Index is an easy way to check how the stock
market is doing. If the index is rising, it means that the
price of the companies on average are rising. If the index is falling, it means that the
price of the companies on average are falling. Finally I’d like to mention that stock markets
are classified in many ways, one being different sectors. These sectors are for example Energy, Financials,
Information technology and so on. Sectors make it easy for investors to find
companies that they prefer to invest in. Let’s say you know everything about Energy,
but have no idea how Information technology works. You can easily just go to energy section of
the stock market to find companies that you know about. You should never invest in companies that
you don’t understand. Thank you for watching the first episode of
the investing in the stock market for beginners series. If you want to learn more, subscribe and click
the notification bell so you don’t miss out on anything! Next episode of the series is coming next
Wednesday, and it will be about Different profits and compounding! Have a nice day, and I’ll see you later!

About Ralph Robinson

Read All Posts By Ralph Robinson

1 thought on “Definition Of A Share – HOW THE STOCK MARKET WORKS

  1. Thank you for watching Episode 1 of the series! If you have any questions, feel free to ask!

    Next Wednesday we will discuss about different ways to make profits, and compounding, don't miss out by subscriping!

    How to Start Investing With Little Money:

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