Understanding Basic Investment Products: Stocks

understanding-stocks-101

It can be very intimidating to get into investing, especially for young people or people newly endowed with large sums of cash (such as in the cash of an inheritance). Investing can feel a lot like gambling, and it a lot of ways it is, so many people are hesitant to throw their hat in the ring.

They do not like the idea that there is a chance that they could lose all their money. And who would, right? We all work hard for our money and the thought of one bad day on the market taking it away can make even the bravest man say “hey, no thank you”. But that is a very narrow and untrue version of what investing can look like.

If you have the money to invest, you need to take advantage of that opportunity. Let your money make more money. This is how the wealthy live because it is the smart way to manage extra cash.

The first step to alleviating the fear of losing money when investing is becoming familiar with several investment terminologies. The different types of investments you can “buy”, or “put money into”, are called products. Below is a brief and clear definition of one of the most common types of products beginning investors might be interested in.

This is the one you hear about all the time, right? Stocks are purchased at the stock market. That is probably all the novice investor knows. Well, that’s true, the stock market is the place (the place here being both physical and digital) that stocks are bought, sold, traded, and monitored. Stocks are, essentially, pieces of ownership in a company.

Say I own “Sarah’s Hat Store”. I want to get more free cash to expand Sarah’s Hat Store into an international company. To get that cash I decide to offer up chunks of my ownership rights to other people. Those chunks “go public” on the stock market as—you got it—stocks. Now the public (you) can buy those stocks. Each stock represents a piece of Sarah’s Hat Store. You are now partial owner, or, “a shareholder”.

If Sarah’s Hat Store does really well, the value of your ownership will go up so the value of your stocks will go up. If you bought the share for $5 before, the value might be $7. You can decide to sell and take a $2 profit or hold on to your stocks and see what happens. If the Sarah’s Hat Store does poorly, the value of your stock might fall. Now it might be worth $3. If you sold you would have lost $2 by investing. Or you can hold on still and see if the price goes back up.

This is the part the people get nervous about: the possibility that they might lose money on their investment. And this is a legitimate worry, but if you work do your research on the stocks you buy, or you work with a registered financial advisor, you will build a portfolio of stocks that balances itself out, so that if one stock falls (loses money) it is likely that your other stocks will rise to offset that loss.

Learning the basics of the investment industry is essential to managing your money wisely.

About The Author

Edwin is a marketer, social media influencer and head writer here at Daily Finance Options. He manages a large network of high quality finance blogs and social media accounts. You can connect with him via email here.

 

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