Stock Market Basics

One of the main reasons people remain hesitant about investing in the stock market is the feeling of intimidation by the magnitude of the market along with the fear that they may, literally and figuratively, lose their shirts. But, buying stocks doesn't have to be as confusing and scary as it first might seem. By educating yourself about the fundamental basics of what stocks are, how they work, and how you can potentially make, or lose, your investment, you can develop the tools you need to feel more confident about taking the plunge and investing.

What Are Stocks?

Simply put, stocks are a share in the ownership of a company. Original owners of a company sell stocks to gain funds to help the company grow. If a company does well, or even if the market only believes that the company will do well, then the value of the stock increases, and the investor, also known as the shareholder, will make a return on his investment. This is because the stock is now worth more than when it was purchased. If a company does not do well, then the value of the stock decreases, and a stockholder will lose his investment because the stock will now be worth less than its original purchase price. Through this process, investors can either make money or lose money on their investment.

In addition, if you own stocks in a company, then you not only get a share of the company's earnings, but you also receive voting rights regarding the stock and in electing the board of directors of the company. The more shares an investor owns, then the more votes he has. If an investor can acquire more than 50% of the company's stocks, then he can essentially take over the company. Yet, despite this voting right and although investors are technically a part owner of the company since they hold the company stock, they do not have any say in the day-to-day running of the company.

How Can You Make Or Loose Money With Stocks?

When an investor purchases a stock in a company, then he essentially owns a percentage of that company's assets and earnings. The more stocks someone owns, the greater his ownership over the company. If the company does well, then the investor gets a percentage of its earnings and its profits. A shareholder's hope is that the shares he owns will someday be worth more than what he paid for them. However, there is no guarantee that anyone will make money in the stock market. If the value of a stock goes down, then the investor will lose not only any potential profit on his investment, he will in fact lose his investment.

Also, if a company a stockholder invested in collapses, then he only receives a portion of money that is left, if anything, after the creditors are paid off. A shareholder's claims on the assets of the company are less than those of the creditors.  Therefore, if the company goes bankrupt or is liquidated, then he will not receive any money until the creditors, such as the banks who financed the company, are paid. In this case, the shareholder will probably not only fail to make a profit on his investment, he will actually lose his whole investment. Investors can only make money on the stocks they own if the company they invested in does well. However, stockholders cannot lose more than their perceived profits and the principle they invested. If a company is in debt, the investors are not liable or responsible for this debt. Creditors cannot come after stockholders for the money they are owed.

Article written by Nicole Sivan