Why should you Invest in Stocks
The idea of investing has been around for a long time and people invest for a variety of reasons.
The main reason people invest in the stock market is to increase their wealth, but there are other reasons such as;
Reasons for investing:
- Providing a sufficient nest egg for retirement.
- Saving for their kids’ college education.
- Investing to provide a more comfortable lifestyle.
- Invest to obtain a better return on bank account savings.
The reason for investing is in itself not important, but the reason does dictate which approach to investing would be the most appropriate.
The simplest approach to investing is to invest in something like a certificate of deposit and this suits some people, but the returns are relatively small.
Simply saving spare money will provide a future cash benefit and investing this will provide an additional return.
There are numerous approaches to investing, all with varying risk levels. The basic rule is that the higher the return, the higher the risk level associated. Also, the time frame needs to increase as the risk increases.
The stock market is probably the most popular investment choice with long-term averages of around 10% per year for the conservative investor.
Beginner investors can be reluctant to venture into the stock market for fear of the perceived market risks involved.
While any investment involves a degree of risk, most of the risk associated with the stock market is in not understanding what the stock market actually is and/or utilizing inappropriate investing strategies for their investment goals – this is referred to as investor risk.
Broadly, when you invest in the stock market, you invest in the future of the economy. Over the last century the economy has grown substantially and thus you are investing in the wealth of the nation.
Investing in the Stock Market
The stock market can seem like a daunting place for the beginner stock investor and simply understanding the stock market can seem like an insurmountable task.
Financial publications such as books, magazines and the newspapers all tend to be aimed at those investors that already have a basic understanding of the stock market.
Even a lot of introductory material tends to assume a basic knowledge of the stock market. So where does that leave the beginner stock investor?
The irony is that stock market is fairly straight forward and quite easy and quick to learn when using a structured systematic approach.
So in this introduction, let’s simplify it right down to the essential basics to get you started.
Shares
A share is a part ownership of a company that is listed on a stock exchange. These companies typically have millions of shares and investors can purchase as many shares as they desire.
Stocks
The term stocks is an accounting term and in the stock market stock is used in the same context as share and these terms are used interchangeably.
In the U.S. the term stocks is commonly used when referring to a part ownership of a company. Other countries like England and Australia like to use the term share.
Public Company
To keep it simple, companies can be classified as either private or public and both have shares.
A private company can have several owners, let’s say 4 owners each of equal share. Now say this company was worth $100,000, this makes each owner’s share worth $25,000.
A public company is usually much larger, say $100,000,000. Thus with only 4 owners, each owner would need $25,000,000 to be a part owner. Needless to say most investors could not purchase a stake in this company.
So to get around this financial problem, the concept of public companies was developed.
With a public company the ownership portions are split up into very small parcels, say 1,000,000 shares. Now with the $100,000,000 company, each share is only $100. Thus most investors can afford the buy a stake in this company. Further more, they can buy as many shares as they can afford. For example, buying 10 shares at $100 would cost only $1,000.
Listed Company
Public companies are listed on a stock exchange, hence the term listed. Generally when referring to listed companies within the context of the stock market, they as simply called companies. The term listed is implied and they are public because they are listed on a stock exchange so that the public can purchase shares in these companies.
Stock Exchange
Stock exchanges provide two primary services. The first service is to list a company and make the initial offering of the company’s shares to the public, which is done through a stock broker.
These initial shares are referred to as an IPO which stands for initial public offering.
The second service is to provide a means by which those initial stock investors can sell their shares and thereby allowing other stock investors to buy the shares from them. Hence the term stock exchange.
There are two main stock exchanges in the U.S. The New York Stock Exchange (NYSE) which is the world’s largest stock exchange and the NASDAQ which stands for National Association of Securities Dealers Automated Quotations and is the world’s second largest stock exchange.
Stock Broker
A stock broker is required to buy shares in a company. They place your order on the stock market and purchase them from someone who is selling their shares, which is also done through the stock broker. Thus the stock broker acts as an agent for buyers as well as sellers.