Stock Market
What is the
Stock Market?
The stock market is where personal or institutional investors can buy and sell shares of a public company. A share is a piece of a company that people can buy and the price of the share is depending on the supply and demand of the market. If the price of the share increases and you decide to sell the share, you will make profits off of the differences. If the cost of the share decreases and you sell the share, you lose money based on how much the share was down. The stock market also consist of many different indexes, examples of these indexes are the DOW jones, S&P 500 and the NASDAQ. The price of an index is based on how the stocks it reflects are doing; the S&P 500 reflects how the 500 biggest companies stocks are doing. The stock market also gives investors different options on how they want to invest their money. Investors can trade bonds, mutual funds and shares.
Bonds
A bond is a loan to a company that gives you a fixed rate of interest. If you own a bond, you are able to sell the bond to other investors for a pay out.
For example:
Investor 1 bought a bond for $100 with a 1% interest rate. After one year, Investor 1 received $1 of interest. Investor 1 decided to sell the bond to Investor 2 for $120. Investor 1 made a total of $121.
Stocks
When you find a stock you are given two options: buy or short the stock. The difference between buying and shorting a stock is whether you think the stock will increase in value or decrease in value. If you think it will decrease in value, you should short the stock; if you think it will increase, you should buy the stock. If you decide to buy a stock, you will put in an order for how many shares you want to buy and the price you willing to buy it for. If another person is willing to sell you the shares at that price, you will be in possession of that stock. Once you own the stock, you then are able to sell it when you wish. Shorting a stock works a little differently from buying a stock. When shorting a stock, the investor borrows a stock, when they are ready to sell the share, they buy it for the current price of the stock and gives those shares back to its owner.
For example:
Buying: Investor 1 currently owns a stock at $10, and Investor 2 decides that he wants to buy the stock. He puts in an order for one stock at the price of $10. Investor 2 buys the stock from Investor 1. The stock then goes to $11, and Investor 2 sells the stock for $11 and makes a profit of $1.
Shorting: Investor 1 owns a stock at $10, and Investor 2 decides that he wants to short the stock, so he borrows Investor 1’s stock. The stock price then drops down to $9. Investor 2 buys a stock at $9 and gives the stock back to Investor 1. Investor 2 made a profit of $1.
Mutual Funds
In a mutual fund, investors group their money and put it into a fund together. This fund is made up of individual stocks, bonds and different securities. The fund manager will invest in behalf of each of the investors, then depending on whether there is positive or negative gains, the investors either lose or gain money.
At first the stock market is very intimidating, but over time you start to learn different tips and skills on how to learn about companies and if they are a good investment. It is very good to start learning about the stock market, so when you are 18 you can start trading knowledgeably. Trading on the stock market can be very difficult and risky, but it is a great way to be financially successful.