Before venturing on your journey you may be wondering, what exactly is the stock market? You hear about it so much, it almost sounds like a fancy buzzword. Well, the stock market, aka the equity or share market, is an aggregation or loose network of buyers and sellers of stocks. This loose network deals in the economic transaction of shares.
Stocks, or shares as mentioned above, are parts of companies that you can buy and sell. When you buy a share of a company, you buy part ownership of said company. This makes you a stockholder and gives you access to earnings from this company and a portion of assets if the company decides to liquidate (disband the company and divide assets between claimants, aka you.)
Stock is divided among the initial owners of a company at that company’s formation with additional shares being authorized and sold during the company’s history. Some stocks are given a nominal value or a Par Value, which represents equity on the corporation’s balance sheet. Other stocks are sold without associated Par Value.
Stock can be bought privately or on the stock exchange. A stock exchange is a facility where stock brokers and stock traders can buy and sell securities, like shares and bonds. Think of it as the marketplace where the big boys play. A lot of the buying and selling takes place on the trading floor where it’s common to see transactions taking place through Open Outcry. This is a method where shares and bonds are traded through shouting bids and offers out loud. This is often the scene you walk into when visiting the New York City Stock Exchange, which is the largest stock exchange by market capitalization.
Stock exchanges aren’t always physical locations and with the internet age and the age communication being this generation’s home, you can find quite a few online stock exchanges to check out. NASDAQ is a well-known stock exchange who trades stocks and shares over an online network. NASDAQ’s system of buying and selling is actually rather similar to the New York City Stock Exchange and one that’s worth checking out once you’re familiar with the process.
When buying stock privately, this process is done in a more discreet style. When a stock is privately traded, the one’s who are able to buy and trade are those who are employed or are investors of a company. These kinds of transactions have to be approved by the majority owners of the corporation, so if you’re interested in getting in on private stocks it’s best to get out there and network as soon as possible. You’ll want to know the right people to even be in the room to get a piece of the pie. However, a lot of times new companies will offer and provide equity in the beginner stages in place of salaries. So, if you have your eyes on a startup and see future success on the horizon, it’s best to get in on those stocks early when it’s not too expensive to buy-in.
When getting into the stock market it’s important to know the suppliers. Who are the suppliers you ask? Well, they’re the Market Participants. Market participants are made up of individual investors, institutional investors, and publicly traded corporations all who trade in their own shares. Another major player is Robo-Advisors, who automate investments for people. Robo-Advisors also provide financial and investment advice based on algorithms. This cuts down on human intervention, therefore freeing up time for other endeavors and ease of access. It’s a dream come true for newcomers to the stock business.
Another important part of the stock market is knowing your demographics and how they affect the market at large. For instance, knowing about indirect vs. direct investment. Indirect is the ownership of share through mutual funds or exchange-traded funds. Direct investment is when you directly own the shares, as the name implies.
There’s also the participation impacted by wealth and income. Speaking of, the lowest level of income participates in the stock market by a margin of 5.5% while the highest has a participation margin of 47.5%. Knowing this will better help you know not only your peers in the stock market but who to sell to and network with. This amounts to nearly half of all US households not being involved in the stock market, which is a surprising fact considering how competitive the stock market is. Although, that stands as more incentive to join in and get your piece of the pie.
Don’t forget to factor in behavioral economics and EMH (efficient- market hypothesis) when dealing in the stock market. EMH is the hypothesis that asset prices reflect all available information at the current time. What this basically means is that there’s low probability in “beating the market” due to market prices only reflecting new information. It’s an interesting thought process to keep in mind, even if you’re of a “high risk, high reward” mindset. Although there has been harsh drop in share prices with no direct correlation. So, take it with a grain of salt, if you will.
In fact, turning back to the high risk, high reward mindset, the randomness of the stock market is what attracts a lot of people to it. It’s almost the highest level of gambling one could take part in. Take a risk, take a shot and reap the rewards. Just be sure that all your ducks are in a row and you have a safety net to catch you if you fall.
Also keep in mind, the transaction of stocks is a highly regulated practice that should be taken with the utmost respect and proper protocol lest you be under watch by the government and end up in federal prison for fraud. This regulation protects investors and the greater economy so, all around everyone wins when we play fair. We’re here to win but we’re in for the long haul and we want long money, not short success.