So, you are earning a good amount of money in a pretty good job. Are you saving your money enough? Are you investing friends?
Well, you would have always wanted to invest, particularly in stock market also known as share market. But did you feel like all the Stocks related words are so complicated and boring to understand? So, did you ended up avoiding the terminology Stocks totally?
Please know that this blogpost is not one of those posh complicated articles which uses hi-fi terms about Stocks. But I have written in a very simple term using simple words.
When you finished reading this article you will be having the confidence to do buy or sell stocks or at least you will start researching more on stocks as your interest level will become high on stocks/shares topic. Please READ ON……
The following topics are discussed in this blogpost:
- What is a stock?
- What is a share?
- Who is a stockholder?
- What is Stock exchange?
- What is Brokerage?
- What is Fractional shares?
- Why company issues shares?
- What is Equity?
- What is IPO (Initial Public Offering)?
- What is dividend?
- What is Long-term trading?
- What is Short-term trading?
- What is Day trading?
- What is Swing trading?
- Why check the local tax laws?
- What is long term capital gains?
- What is Shorting?
Ok! Here we go…….
What is a stock and What is a share?
Imagine if you have a cake, and you’re putting the cake into several slices. Depending on the number of guests coming for your birthday party, the number of slices in the cake will increase. But then the thickness of the cake slice will become smaller.
Here the cake is the company. Each slice is a share.
Stocks are a type of security that gives stockholders a share of ownership in a company.
Who is a stockholder?
So, the guests who came for your party are the stockholders or also called shareholders. More the number of shareholders lesser the value of a share in a company’s stock.
You can’t think that it is very good always if you have a greater number of shares in a company.
You can have 100 shares in a company but the value of their stock could be smaller. You can have just 1 share in a different company but their stock value being higher. So, it depends on each scenario.
Because weight of the cake depends on how big the company is, for example, the company like Apple is so big so their cake is bigger than another company such as Red Robin restaurant.
What is Stock exchange?
To do all these stock related transactions, the government enforces strict rules and regulations and guidelines and laws, the place where these transactions can happen is called stock exchange.
There are many stock exchanges in the United States. For example, NASDAQ, NYSE, CBOE etc.,
Usually the company (during IPO) picks up a stock exchange while forming the company in the beginning stage and lists their shares in that particular exchange.
But nowadays many almost all stocks can be traded in any of these exchanges as it has become fully electronic.
What is Brokerage?
As a common man we are not allowed to enter stock exchange and do the trading.
So, we hire an organization called brokerage, who is someone who buys and sells shares on our behalf and based on our instructions.
Brokerage can’t independently decide to buy or sell, they look for our instructions. Example brokerage firms are Robinhood, TD Ameritrade, Charles Schwab, E-trade, M1 Finance etc.,
What is Fractional shares?
In earlier days, you can only buy shares in whole numbers only like one full share.
You cannot buy or sell fraction of shares.
But nowadays many brokerages allow to buy and sell fractional shares. But not all brokers allow this.
For example, if you like Amazon very much (which is selling at right now at 3300 dollars per share) you can buy and sell a fraction of it. You don’t have to give entire 3300 dollars and get one full share.
How convenient……isn’t it!
Why company issues shares?
To start a company, a promoter, needs capital money. Let’s say the promoter is in need of 100 million and he has only 20 million.
He can raise capital money in two different ways. One method is going to a bank and asking for a loan for the remaining 80 million. Second method is asking the public to give money (80 million) and in return they get ownership of the formed company.
In first method the company has to pay back the loan to bank as per the agreed terms and conditions.
In the second method, the company doesn’t have to pay back as they have given ownership in place of capital.
That’s why the companies always prefer the second method which is issuing shares to the public.
What is Equity?
The public can buy or sell their shares anytime but the price is determined by the market. Everyone hopes the company will perform well and thereby the price will go up after they buy. First method is called debt market and the second method is called EQUITY. Stock is also called as an “equity.”
What is IPO (Initial Public Offering):
Let’s assume 100 million shares are issued and each share is 1 dollar.
Now, since the promoter has invested 20 million, he gets 20 million shares and the public gets the remaining 80 million shares. Any person in the market can buy 5 or 10 or 100 or any number of shares based on his available capital.
First time a company is getting formed and raising money is called IPO (initial public offering). This is called primary market.
Once the company is formed the shares can be bought and sold when the stock market is open. That is called secondary market.
What is dividend?
Dividend is the profit distributed back to owners.
For example, let’s say after the first year, after all expenses and taxes, the company has made 20 million dollars as profit.
We know there are 100 million-shares, so this 20 million has to be distributed to 100 million shareholders.
As a promoter, who owns 20 million-shares he gets 4 million because one fifth is his ownership. And the remaining 16 million gets distributed among the public. This is called dividend.
Many companies pay dividends quarterly. The decision to pay dividend is up to the board of directors of a company. Not all companies pay dividends. Even if they pay dividend, they can start one year and stop another year based on company’s financial needs.
There are two types of investors. One is long-term investor and other one is short-term investor based on time horizon.
What is Long-term trading?
Some people will buy stocks and wait for a greater number of years like 5 or 10 or even 25 years, by watching it grow and then reap the profit.
What is Short-term trading?
Some people will buy and sell stocks within a short period of time.
Types of short-term trading are day trading and swing trading.
What is Day trading?
If a person buys and sells the stock within the same day, like buying in the morning and selling it by the evening, then it is day trading.
What is Swing trading?
If a person buys some stocks and waits for a brief time like 5 to 10 days or 2 weeks to sell it, then it is swing trading.
Why check the local tax laws?
Based on the country we live, there are difference in tax treatment on the profit or loss for short-term and long-term trading. So, please check your local tax laws.
What is long term capital gains?
For example, in United States of America, if you hold a share for more than one year and then sell it, the profit you made will be considered as long term capital gains. And it has lower tax percentage than short term capital gains. Short-term capital gains, which is like if you buy and sell a share within and less than one year.
What is Shorting?
Traditionally, an investor makes profit by stock price appreciation. That is buy low and sell high.
Shorting is a method of borrowing a stock or a share from the brokerage and giving it back to the brokerage later.
For example, let’s say an investor predicts that the stock price will go down in a month, so he borrows from a brokerage firm say 100 shares at 10 dollar each and immediately sells to the market at 10 dollars. Now he has 1000 dollars in hand.
After a month, the stock price goes down to 8 dollars. Now he buys 100 shares from the market, at 8 dollars apiece (total 800 dollars) and it returns those 100 shares to brokerage and he pockets 2 dollars per share difference.
Thus, he got a total profit of 200 dollars for 100 shares. Here he “shorted” the shares as he predicted the stocks to go down and made profit out of this method.
So, not only you can make profit when the stock price goes high, but you can make profit even when the stock price goes down.
So your next question is: I understood the basic terms, what next?
Ok now you have to find a good brokerage firm of your choice in your country. Example brokerage firms in USA are Robinhood, TD Ameritrade, Charles Schwab, E-trade, M1 Finance etc.,
Set up an account with them.
While setting up the account, it will ask for your bank account details to get/deposit the money directly.
Before buying or selling in this brokerage website, you need to know which company stocks you are interested in.
So, go to these finance related websites like yahoo finance, or google finance, or MSDN etc., (For other countries: Please do some research and find out your country specific trustworthy websites for stock details information.)
For example, go to my favorite “yahoo finance” website.
In the search bar, type the stock name or company name that you are interested in. (For example, if you like to know about Apple, then type the word Apple or AAPL)
Press enter key, you will get a page full of details of that particular stock.
Now go through all the details of this page thoroughly.
Get to know the current dollar amount of that stock.
Now go back to the brokerage website.
Login to your account.
Buy or sell that particular stock you just researched on.
Brokerage website will lead you to your bank account for money transaction.
That’s it! You’re officially done with buying or selling stocks in real world.
Whether keeping this stock for many years without selling or immediately selling it back, is up to you!
To gain more knowledge on when to buy/sell particular stocks, you have to do plenty of research by daily going to finance websites and check on stocks news.
Watch those FREE videos in YouTube on Stocks.
With that, this is the end of part two on stocks topic. Hope it helps someone. Thank you for reading!
Happy Investing Friends!
You have made complicated information easy to understand.