Thursday, 22 April 2010

An Overview of the Stock Exchange

An Overview of the Stock Exchange

There are few words in the English language that can inspire more fear than the words, "Wall Street". Viewed as both the ultimate get-rich-quick location and a boulevard of broken dreams, "The Street" is littered with the hopes, dreams, and finances of many an unwise investor. Perhaps this is the reason that so many people are afraid to invest in the stock exchange... they like the thought of being able to invest, but too many horror stories have them falling ill at the mere thought of it.

In truth, however, the stock market is only scary if you let it be. 

Looking at the stock market (aka "Wall Street", "The New York Stock Exchange", etc.) from a logical standpoint helps to take a lot of the fear and loathing out of it. 
  • Yes, there are a lot of investors who have literally made millions overnight playing the market. 
  • There are also a much greater number of investors who have lost that much or more in the same amount of time. 
  • Right in the middle, though, is where most people end up... no great gains, no great losses, just an average portfolio that lets them put aside their invested money for months or years until they need it. 

But let's take the first thing first... what exactly is the stock market? Basically, the stock market is a marketplace like any other, but instead of buying tangible goods such as produce or supplies the investors purchase pieces of publicly-owned companies.

As a quick example, let's look at Wal-Mart. Wal-Mart is a publicly-traded company, public citizens can purchase portions of ownership in the company (also known as "shares"). Most publicly-traded companies have billions of shares or more, so most people can freely invest their money into these companies without worrying about the company running out of shares.
  • If the company does well financially, more people will want to buy those shares and the price of the shares will go up. As the price of the shares goes up, the shareholders will make money. 
  • Alternately, when the company does poorly or is wracked with scandal, then people don't want to buy it (and want to get rid of what they have) and the price will go down, sometimes drastically (think Enron.) 

Due to this fluctuation in prices depending upon the actions of the company, there is a great potential to both make and lose money without much effort.

The popular saying, "Buy low, sell high," is some of the best advice that anyone can give, if you have an opportunity to follow it.
  • When a company has potential or is doing well and is reasonably priced, it can be a good investment to buy as much as you want or can afford and hope that the prices rise
  • If a company reaches its peak or starts to perform poorly, sell off at least some of what you own for a profit, and then watch to see if prices fall.  
  • (There is another option, of course... don't sell the shares and see if the stock recovers at a later date. This can sometimes be your best option if you're investing long-term or as part of a retirement plan, but in some cases the company is unable to recover or goes out of business.)

In addition to "buy low, sell high", another common phrase in dealing with the stock market is "diversify your portfolio." Though diversifying can seem a bit confusing at first, it basically means that instead of buying all of your stocks as a single type, you should buy a variety of different stocks and bonds in a variety of different industries. That way, if one type of stock starts doing poorly (such as telecommunications companies), then you'll be leveled out by another section that's showing an increase in prices (such as biotechnology). 

Of course, there is more on the stock exchange than just publicly-traded companies. In addition to company stocks, you can also buy bonds in futures (bonds that are usually based upon perishable goods and are estimates of how well they will do at some specific future time), government bonds (kind of like savings bonds, but are based in various government programs), and indexes (based upon an average of prices for the indexed product, such as diamonds or precious metals.) Indexes and government bonds are especially useful when diversifying, as they are generally much more stable than other forms of the market.

The most important thing that you need when deciding to invest is a little bit of common sense.
  • If something sounds too good to be true, be wary of it; if you're looking to get rich quick, you're looking in the wrong place. 
  • Be smart, research stocks and bonds, and keep an eye on your money. 
  • Invest with long-term goals in mind, and try not to freak out when one or two of your stocks take a temporary dip. 
  • There is money to be made in the stock market, as long as you allow it to happen.

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