Introducing the Stock Market Now that you know about saving and investing, you are ready to learn about the stock market.
Turning Savings into Capital If your financial goal is to make money from your money, the stock market may be the perfect way for you to meet your goals. You will want to start with a nest egg you built in your savings account. Use it to set up an account with a broker. The account with your broker is your capital . Now you need to learn what you can do with it.
Companies need Capital Companies need capital money to buy buildings, machines, and raw materials to create their products or services. Companies raise capital by selling ownership in the company. The ownership of a company is it’s stock . A share is a piece of company stock , or ownership. A person who owns one or more shares of stock in a company is called a stockholder . Stockholders share in the profits of a company and vote in how the company is run.
Investors have capital. Investors are people like you and me who have saved some money and want it to grow. Investors use their money to buy ownership in a company. The investor’s money become capital for the company. The company pays the investor part of it’s profits for the use of the capital.
Meet at the Stock Exchange Companies that need capital and investors who have capital come together at a Stock Exchange. There are many Stock Exchanges around the world. In a Stock Exchange, investors get together to buy and sell stock in companies to each other. Trading is the constant buying and selling of stock. Trading causes the value of a share of stock to change. The value of a share of stock is it’s price. The price of a stock can change from minute to minute.
Profiting from Stocks <ul><li>Investors can make a profit from owning stock: </li></ul><ul><li>If the company makes a profit and distributes a dividend to each stockholder. The dividend may be cash, or more shares of stock in the company. </li></ul><ul><li>Investors can make a profit from trading or buying and selling the stock: </li></ul><ul><li>If the price of the stock goes up and the investor sells it for more than he paid for it. The investor must sell the stock to earn the profit. </li></ul>
Stocks Market Losses <ul><li>Investors can lose when a company goes bankrupt. </li></ul><ul><li>Companies big and small fail every year. If the company you own stock in goes bankrupt, you lose what you invested in the company. </li></ul><ul><li>Investors can lose when the value of a stock goes down. </li></ul><ul><li>If the price of the stock goes down and you sell the stock, you take a loss on the difference between what you paid for it and what you sold it for. You only have a loss if you sell the stock. </li></ul>
Owning Stock Most investors want to convert their savings to capital and let it grow in value as the company grows profitably. Many investors buy a stock to hold it for many years. Business cycles cause the price of the stock to go up and down, but over time, successful companies’ stock goes up in price. Owning a stock is the only way to profit when dividends are distributed. The value of the stock you own usually increases when the company declares a stock split and you earn more shares.