The Break Down: The Stock Market
Disclaimer: this article is an introduction to the subject - always consult an expert before making financial decisions.
The stock market is something you've definitely heard of, but if you're reading this, chances are you don't know what it is. The stock market is a big, defining part of modern day capitalism and has real world impacts on you, even if you’re not invested. Time to wise up - we're going to introduce what it is, how it works and how you can start to get involved.
What is a stock?
To understand the stock market we first have to know what a stock is. You can think about a stock, also commonly referred to as a share or equity, as a part ownership in a company. Imagine a company has been started by one person; they own 100% of the business because no one else is involved. Now, they might decide that they want to expand their business, but don’t have the money to do so, one way to change this is by ‘going public’.
This means that you offer small bits of ownership of the business to the general public to buy. The money the owner can make from it can help profit the company and those that buy, who are called shareholders, have an investment stake in the company and will profit as the business makes money.
There’s a few ways they can earn from their stocks. Firstly, they could sell their shares for a higher price than they bought them as the better the company does the more that a stake in it is worth. Some shares also give holders dividends which is when the company takes a portion of its profits and shares it among their investors according to how much stock they hold. This is essentially a way of making passive income, as you don’t have to do anything except hold onto the shares.
What is the stock market?
So now we’ve seen how owning stock can make you money, let’s talk about how you get stock in the first place. When a company decides to go public, it is listed on the stock exchange. This is another name for the stock market, and it’s where shares are listed for sale by companies and investors who want to sell. It works just like any other marketplace, and traders work to sell at the highest rate and buy at the lowest possible so they can profit. When these prices meet, a sale is made.
If you google the price of a share and it says it’s £10 that means that is the price for an automatic buy or sell. There isn’t just one stock market, there are a few such as the NASDAQ, the London Stock Exchange and the New York Stock Exchange to name a few. Stock markets also have open hours when people can trade, usually following the 9 to 5 timings and when they close, trading is over for the day.
To access the stock market and buy shares you need a stockbroker. This is just a company that gives you the ability to trade; most now work online with apps you can download on your phone. Some examples are IG, Interactive Brokers, Saxo and Charles Stanley Morgan. Different brokers will all offer slightly different services, so to find the best for you you’ll want to see which will accept you (for instance if you have limited funds or are working through an ISA account) and compare their fees and trading costs.
How do I navigate the stock market?
You’ll often see in the news that the stock market is up or down. This is because the stock market works on expectations; traders buy stock expecting it to go up in value, and sometimes that doesn’t happen and certain companies or areas of the economy start losing money. Additionally, company announcements, political decisions and unpredictable events all change how people spend money and therefore impact the companies that make up the stock market.
How ‘the stock market’ is doing means different things to different people. One judgement is done using indexes which means taking multiple companies and comparing them to create a general idea of how the economy is faring. Examples of indexes are the DOW, the S + P 500, or the NASDAQ Index.
When the Dow (a group of 30 major American companies) goes down in share value, it can be an indicator that the economy is not doing great as those companies are usually stable. There are groups called EFT’s and index funds which track the companies in indexes and allow you to invest money in all of them rather than buying individual shares from companies on your own.
This type of investment is called passive earning. If you chose not to do this and work independently and actively then you typically have higher charges from brokers and do more work, but have more control over what you invest in. There are constant ups and downs (called bulling and bearing by traders) in the stock market that are short term and not huge issues if you’re holding onto shares in a longer term. You can navigate this as a beginner by setting up standing orders for certain stocks at specific prices if you know you'll want them when they get low enough, or you can put in orders ahead of time if the markets are closed but something happens to impact your trade decisions.
Should I invest in the stock market?
The stock market is just one way to invest your money. In next week's article we’ll discuss other ways, but investing in shares is a good way to stay on top of inflation and create an alternate source of income. There are different ways to invest in the stock market, whether through a stock and shares ISA, or if you act more passively and give your money to professionals to invest for you. The stock market is an inherently risky place to put your money, as the price of shares fluctuate daily and making some losses is less of a risk and more of a guarantee, but it can also help you profit and improve your financial understanding.
As with much of the content we discuss, whether it's right for you is an entirely personal decision, but if you choose to get started, some general approaches experts recommend are:
- Invest long term and have a plan
- Don’t sell in a panic when your stocks drop low
- Invest in companies that have a good index history
- Put your money in an EFT if you don’t feel confident in your own management yet
- Split your investments between companies and areas (such as tech and agriculture) to minimise risk
- Keep informed about the economy so you can make educated decisions