How the Stock Market Works – Beginners

The stock market has been proven to be one of the best ways to become a financial success. Modern technology allows us to access the market a lot faster and have the opportunity to gain information about trades, stocks and companies instantly. With all this information, it might seem as if trading stock is easy, but one of the biggest mistakes people make at first is not learning what the stock market is and how it works.

This is the first step to finding out how you can become a stock trader and what it actually means to trade. To understand the basics of the stock market, we need to break it down and make it as simple as possible. Therefore, we’ll use simple examples and keep things on a smaller scale, allowing you as a beginner to understand exactly what the trading process is all about.

What are Stocks?

Stocks are shares of a company that you can own, meaning you’ll own a share of the company. This doesn’t mean you become part of the company or anything, but rather that you are investing your money in the company with the goal that it would become more valuable.

A simple example of this would be buying a piece of cake, it might be a tiny slice, but you own part of that cake. Now to get that slice, you need to be linked to a “store”, which in the trading world is known as a broker that’s available via telephone or the more popular option in today’s internet driven world is a trading website or app.

Why Own Stocks?

Doing your research on companies is important as it provides information about the company, where they’re headed and the future value of the company. The idea is to make money, “buy low, sell high”, meaning your slice of cake has to increase in value before it becomes worth selling.

Therefore, it’s important to research and determine whether the value would increase over time. Of course, it’s completely possible for a much higher price in a few weeks, months or years from now. Perhaps the cake is something new and expected to become very popular within the next few months, or it’s becoming rare, and people are prepared to pay more for it sometime soon.
The fact is, there are many reasons you’d want to purchase part of a company, but at the same time, there are just as many reasons (if not more) why the value of the stock could decrease.

Why Sell Stocks?

Owning a share doesn’t give you anything but an increase or decrease in value, meaning you can’t use the share to pay for your bills or purchase anything. However, you can sell the stock for a profit and use the funds you receive to pay for things or buy into a new company.

There are many reasons to sell a stock, not only relating to the need for funds, but also the future of the stock you own. For example, you’d sell a stock if the value isn’t expected to increase further or you think it might go down due to recent occurrences within the company.