Understanding Investing: What Is the Stock Market?
The term stock market refers to the collection of markets and exchanges such as the Dow Jones Industrial Average or the S&P 500, where the activities of buying, selling, and issuance of shares of publicly traded companies take place.
How can I invest in the stock market?
Years ago, stock traders on Wall Street made all the moves on behalf of others wanting to invest in the stock market. However, in today’s society and technology era, anyone can easily invest in the stock market using online or mobile app investment platforms like Robinhood, WeBull, or Stash.
When you buy a stock, you are buying a share of a company, which means you own a percentage of the company. For example, if you buy two shares of Nike, you own a percentage of Nike.
Some investment platforms, such as Stockpile and Public, are now allowing investors to buy fractional shares, which means you can buy less than one full share of a stock. For example, if you wanted to invest in a stock trading at $200 per share, you can invest in a part of the stock with as low as $1.
How do you make money in the stock market?
Investing in the stock market is a common wealth-building strategy. People buy stocks of publicly traded companies that they believe will increase in value over time. When you purchase a stock, you own part of a company. This ownership holds a monetary value that can be sold and converted to cash.
Generally, there are two types of ways to make money in the stock market.
If you purchase stocks of a company and the company increases in value, so does their stock. The extra money, or increase in price, is what you gain.
For example, Nora bought 1 stock of Amazon in 2010 for $105 and decided to hold onto the stock until 2021. By 2021 Amazon increased in value, and so did their stock price. Their stock was worth $3,300 when Nora decided to sell it. Her profit on that one Amazon stock was $3,300 - $105 = $3,195. Imagine if Nora would have bought 10 shares of Amazon in 2010? Or 100? She’d be $31,000 or even $319,000 richer!
Another way to make money in the stock market is through dividends. Some companies pay a portion of the company’s profits, known as dividends, to their shareholders.
For example, Dave bought 300 shares of IBM at $125.00 in late 2020. Dave will receive a dividend payment of $6.52 per year. At 300 shares, Dave is expected to receive $1,956 in 2021 solely in dividends.
It is important to note that investing in the stock market is risky and will not always result in making a profit. You can also lose money if the company you invest in decreases in value. Because investing is a risk, it is important to learn how to manage the risks you take while investing.