The Stock Market Explained
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The first step in understanding the way the stock market works is to know the meanings of the basic vocabulary words. The word stock is often used interchangeably with the words shares and equity.even though they are used correspondently they do have slightly different meaning.you get to own a piece of the company when buying shares in a company.a person can say that he owns stock in coca cola.a small part of the coca cola company can be owned by you.
how many shares you hold equals to the amount of company that you hold. Perhaps you hold a single share of stock, or perhaps you have one hundred shares. The more shares of stock you have, the bigger the piece of the company that you own.
when talking about stocks or shares the word equity usually also comes up.a company normally has two options when looking to raise capital , this helps in understanding equity. The first way is perhaps the most familiar to consumers because it is the option to go into debt.an alternate way is to raise finance through equity.what this means is that instead of going into debt the company sells portions of the company to pay off debt.investors buy into the company by purchasing shares and the company uses that money from these investors to finance their debt.investment is made into the equity of the company wehn an investor buys shares of stock.
an element of risk is undertaken by the investors that their stock will increase in value beyond the price they have bought it in.once the value goes up profit can be earned by selling shares to other investors.the profits increase according to the increase in value of the stocks therefore being limitless.the risk is always there of decrease in the value of the share along with increases.investors lose their investment when this happens.
bond is another word that is used when discussing investments. When a company issues bonds, they are financing through debt. People who buy bonds, are loaning their money to the company, and the bond is actually a contract that guarantees the company will repay that debt on a set date.Less risk is involved with the purchase of bonds but the potential profit margin is also reduced when compared to buying stock.a predetermined amount of interest is the profit that is made on bonds.
the value of any given stock is taken by the ecnonomic principle of demand and supply.a stock's price will increase if it is in high demand and many investors want to buy shares in the company .the stock drops if a lot of shares are available in the market but people are not willing to buy it.
this is a simple study of the stock markets vocabulary. For a more in depth look, visit Traders International.
How to Make Money from the Stock Market: Wall Street Insiders’ Investment Secrets (2001)