A basic explanation of the stock market

I have thousands of followers on Twitter. I value my conversations that I have with them. Many of my followers are fairly sophisticated investors but many followers are just getting started. I am open to anyone asking me questions on Twitter or here on this site and I will do my best to answer in a timely manner. Many of the questions that I am asked are fairly basic as the person is simply trying to get an understanding of how the market works.

This article is quite basic. If you are new to the stock market, it should offer some value to you.  If you are a more experienced investor you may want to simply pass it on to your less experienced friends.

In order to invest in the stock market, you should understand some basic concepts. The most fundamental of these is that someone must own any company. I will not get into the ethical or political discussion of whether the government or the private sector should own a company. For the purposes of this discussion, I assume that individuals are empowered to own the company.

Buying a company is similar to buying a lawnmower. If you would like to own a lawnmower for your yard, you would go to the stores in your community, evaluate the different mowers offered for sale, decide which features you need, and then buy the mower that best fits your needs and your budget. If you find two lawnmowers that were exactly the same, you would probably not pay double for one than you would for the other. You would purchase the lower-priced lawnmower, provided there was no difference in features and quality.

Similarly, if you decided to buy a company and you had an unlimited amount of money at your disposal, you would look at all of the companies on the market, figure out what features you wanted in the company, and then buy the most reasonably-priced company that had all of these features that you wanted.

When you buy a lawnmower, you go to a local store. To buy a company, you go to the stock market. If you look at the financial page of your newspaper, you will see rows and rows of listings for the stock prices of companies. These are all the companies that are for sale! The financial page is simply the "catalog" for companies that are for sale. When a company lists itself on the New York Stock Exchange (NYSE) or the National Association of Securities Dealers Automated Quotation System (NASDAQ), it is simply saying that it is for sale.

The problem is that you probably cannot afford to buy an entire company. IBM, for example, is one of the most respected companies on the planet (although it is currently NOT on my Watch List) and currently on sale for well over 200 billion dollars! Even the richest person in the world today cannot write a check for that much money. So how do you own a company when you do not have nearly enough money to buy it all?

Each company is broken up into smaller pieces called shares. That name is essential to understand their purpose: you are going to share ownership of this company with others. These other owners, like yourself, are called shareholders.

Let's use an example that may be close to your everyday situation. Let's imagine that within easy driving distance from your home is a professional sports team named the Capitalists. You are a big fan of the Capitalists and think that their games are a lot of fun. You want to buy four season tickets to the games, for you, your spouse, and your kids. You discover that each season ticket is $1,000, which means that you would need to spend $4,000 for your family. You cannot afford $4,000, and were hoping to pay $1,000.

You could break the news to your family that they all cannot go together to the game and only buy the one seat that you can afford. This means that you go to one game out of four, your spouse to another one in four, and so on. This is not as much fun for everyone, so you decide not to buy the tickets.

You overhear a couple of your friends from work talking about the Capitalists. They wish they could see more games since they are so much fun to attend. You reach out to three of them and offer that each of you put up $1,000 each and share the four tickets. This way each family gets to see one game out of four.

Buying stock in a company is almost exactly the same as sharing the cost of sports seats. The difference is that you do not personally divide up the shares. Neither do you find the friends to go in with you on the purchase. That part is done for you when the company listed itself for sale on the stock exchange. All you have to do is figure out which company you want to buy and then you go to the store (NYSE or NASDAQ) and buy the number of shares (or percentage of the company) that you can personally afford.

You can learn more about the stock market and, more importantly, how to make money in the stock market by buying my book. You can purchase my book wherever books are sold such as AmazonBarnes and Noble, and Books A Million. It is available in ebook formats for NookKindle, and iPad.

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