The Market is down today.
Fear ensues. But how many of us really know why we are fearful and what that statement really means?
When we make reference to the “stock market” we are usually referring to the two main exchanges, New York Stock Exchange and the Nasdaq, where stocks are purchased and sold.
On the other hand, when we refer to the “market,” or stock market’s performance, we are usually referring to the Dow Jones Industrial Index, the “Dow.” The Dow is the average of the 30 most important stocks on the two major exchanges, the New York Stock Exchange and the Nasdaq.
To illustrate how small a subset of the market this is, approximately 2,800 companies are traded on the New York Stock Exchange alone. But don’t let its size fool you. It is a good general indicator of what’s going on in the market and the US economy in general.
What is Stock?
Stock is simply ownership of a company. Owning stock entitles an investor to share in the company’s assets and earnings. Investors also bear the brunt in case of the company’s poor performance. To explain what this means, let’s discuss how stock is created.
A company has two options when attempting to raise money, it can (1) borrow the money and create a debt, i.e. a loan or (2) selling ownership in its company. Stock is created when a company sells ownership in its company. To get its stock out, the company will create an initial public offering, “IPO,” of stock to be sold to investment banks. The investment banks then sell these shares on a secondary market, i.e. the New York Stock Exchange.
Company —–>Big Money Investors via IPO ——->Everyday people via Secondary Market
The stock exchanges are essentially an auction. Stock prices are based on what investors think the company is worth.
Example, Apple (AAPL) is a well-respected company and its stock price of 543.99, as of February 14, 2014, reflects that.
How do you make money with stock?
There are two ways to make money. First, capital appreciation, which means that the value of the stock goes up. Example, you purchase Company X for $30.00 per share, Company X is now worth $50.00 a share. The value of your investment has increased $20.00 or you’ve made $20.00. Second, you make money through dividends, a distribution to a company’s shareholders of profits.
If you can make money with stock by the stock increasing in value, you can lose money by the value of the stock going down. You purchase Company X for $30.00 per share, it has a bad quarter and its stock price goes down to $25.00, you’ve “lost” 5.00. However, the great thing about the stock market is that over time, its value increases. Warren Buffet has the best advice about purchasing stock, “If you don’t feel comfortable holding a stock for 10 years, don’t hold it for 10 minutes.” So as long as you don’t sell the stock when it is down or “realize the loss” you have the ability to recoup your money.
You have probably convinced yourself that you don’t know enough about purchasing stock. I can assure you that you do. You use products and services everyday. You know enough about these companies to buy from them, why don’t you consider buying a piece of them?
Frugal Feministas: What else do you need and want to know about the stock market?
Courtney Richardson is the founder and head blogger at Ivy Investor. She also is a personal finance advisor. She has over a decade of experience working with investors from Wall Street to Main Street.
If you need deeper work around healing your relationship with money or overcoming your blocks and fears, maybe it’s time for some money therapy.