You have probably heard people talk about investment at some point in their life. We talk about investing in yourself by going to school, finding a job, working out and so on.
However, when it comes to investing in the stock market to achieve returns on our hard earned cash, we are very reluctant because we are afraid. I totally understand this fear, because who wants to lose their money by giving it up? After all, we have heard of so many people who have lost money in the stock market and we could be one of them.
On the other hand, people have seen and know people who make money by investing in the stock market and wonder how they do it. Did they just buy a lottery “stock” and wait until they luckily made money? They wonder.
That was me a few years back as well. I did not know that almost every bank is in the stock market, and major companies are in the stock market (Facebook, Amazon, Google, Walmart, Microsoft, Apple, Samsung and many others). Chances are that if you looked up your favorite company that gives you products or services, the odds are that it is listed on the New York Stock Exchange or owned by a company listed on some other exchange.
In this article I will give you the basic idea of investing in the stock market and what it’s exactly all about.
To clearly understand what the stock market is all about let’s start with an example business. The business will be selling bread. When you start this business you have no customers at the beginning. As you tell your family and friends they start to buy the bread from you. From there, the business starts to grow as your family members tell other people.
Normally when you start a business you start with your own money (capital). As the business grows the cost of making the bread starts to get high because of all the materials, staff, advertising and other activities. At this stage of the business you approach family and friends for money to help you out.
You have a number of options with the money from family and friends:
- Take the money as a loan and pay them back
- Take the money and they are part owner of the business
- Take the money as a gift
Option 1 is very easy to understand. If you do not pay them back (which you should) you are going to have very unhappy family members and friends.
Option 2 is similar to a stock market – only that people who gave you money are not your family and friends (more below).
Option 3 is very unlikely but if you are lucky enough to have family and friends to give you money then surely take it, but make sure they understand that it is a gift and not something else.
Back to option 2.
This option is good only if you have family and friends who have lots of money (hundreds of thousands to millions) to give you to grow your business. Unfortunately 99% of entrepreneurs do not have family and friends who have the money to give them to grow the business.
I mean, I definitely understand. Why should they?
- What if you fail?
- Why do you deserve half a million for your idea of bread making?
- They need the money as well for their living.
That is where the stock market comes in. Thank the stock market for funding the gadget that you are using to read this article. My guess is that you are either using a product made by Apple/Samsung/ Microsoft/Google. All these companies are in the stock market.
So, what is a stock market?
Let’s use the example above of our bread making company. When you start the company you own it fully. But as you grow it you sell part of the company to other people.
Basically, you start off owning the full pie (business). If you want investors, then you will have to sell a part of the pie (share/stock). Investors give you the money to run the company in exchange for part ownership the pie.
All you have to do now is to check online for how much “pie” people own of any company. People whom you thought own 100% of Facebook, Amazon, Blackrock, Tesla etc., do not own them. You would be a trillionaire if you owned these companies all by yourself.
However, unlike a pie that you can start eating right away, an investor in the company is very patient to eat their part of the pie (share/stock).
That’s it! That is the stock market at its core. You own part (share/stock) of the pie (company). There are millions of pies (companies) and there are millions of pie owners.
It is very difficult to own the pie all by yourself! I guess parents are right when they teach us to share when we are still young.
Main Idea: The stock market is a place (market) where people (sellers) who have businesses sell part of the business to other people (buyers) to raise money to produce goods and services.
- So how do you start investing?
- How do you become a part owner of the companies that are sold every day?
- Most importantly, how do you make money ?
We will be covering these and other similar questions in the upcoming articles.