Investing in the stock market is a great way to create wealth and financial independence. But what is the stock market, and how does it work? With so many charts and numbers, it’s easy to feel intimidated, so let’s break it down into simpler terms.
What is a Stock?
Let’s imagine that a company is like a pizza, and it’s been cut into many slices. The owner of this company wants to raise money, by selling a few slices on the food market, and keeping the majority to themselves. If you were to buy a slice, that would mean that you own a portion of their pizza. If the price of that pizza were to increase, so would the price of your individual slice – which you can now re-sell at a higher price than which you bought it. In this example, the slices represent stocks, the full pizza represents the company, and the food market represents – you guessed it, the stock market.
What is the Stock Market?
So, the stock market is basically a bunch of people buying and selling little bits of companies based on how much they think these bits will be worth in the future. The stock market in every country has an index, what these indexes do is assess a whole bunch of stock prices and bundle them into one clean number like a score. So, indexes are like stock market scoreboards. If you wanna know how the stock market is doing, you follow what is happening to its index.
What is an IPO?
Now that we have the basics covered, let’s dive into the next concept. In the stock market, some companies have been selling their shares there for years. You can buy a share that has been bought and sold multiple times before – we call this the secondary market. The primary market would be where new shares are traded for the first time. This is what we call an Initial Public Offering (IPO).
What drives the value of a stock?
Stock prices are determined by the supply and demand in the market. If more people want to buy a stock (demand) than sell it (supply), then the price moves up. On the other hand, if more people wanted to sell a stock than buy it, there would be greater supply than demand, and the price would fall.
Understanding supply and demand is easy. What is more difficult to understand is what makes people like a particular stock and dislike another stock. The market, after all, is a reflection of how companies and industries are valued in our society. And as human beings, our perception of value is constantly changing. This comes down to figuring out what news is positive for a company and what news is negative. The factors that affect stock prices fall under a range of categories, such as:
- Company news and performance
- Industry performance
- Investor sentiment
- Economic factors
Although the stock market may have its ups and downs in the short term, investing is a great way to build wealth in the long term. Be sure that you’re investing smartly with a strategy that suits your financial goals, and keep your focus on your long-term goals to avoid making decisions based on short-term panic.