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Stocks basics: Understanding the stock market

The stock market can feel a lot like legalised gambling. A call is made, investors choose their stock, place bets on the stock and if the price of the stock goes up, they win! However, stock market investing involves much more than that. Understanding the stock market and stock basics can help you avoid losses when investing in stocks and shares.

Stocks basics

The first step to understanding the stock market is to understand the terminologies used in stock trading. Here, we explain some of the basic terms used when investing in stocks.

Capital stock

Capital stock, or simply stock, is the original capital invested in a company or corporation by its founders. Stock is different from the assets the company owns because it cannot fluctuate in value or quantity. Capital stock is often accepted as security by creditors because of its central importance in companies.

Shares

Shares are units of ownership in a company’s stock. They are literally shares in the ownership of a company. Shareholders essentially own a piece of a company and are entitled to a small fraction of the assets the company owns as well as the earnings the company generates. They, therefore, also have a say in how the company is run.

Stock market

The stock market (also known as stock exchange) is literally a supermarket for stocks. It is the one-stop shop where stocks of publicly traded companies are bought and sold. Individuals and business representatives meet here to buy and sell shares they own. Like any other market, the rules of demand and supply play a key role in determining prices of stocks sold.

Modern stock markets such as the London Stock Exchange (LSE) and the New York stock Exchange (NYSE) allow trading online. Stock brokers can also do business on behalf of their clients in these stock exchanges. This effectively means investors do not have to be physically present at stock markets to trade in stocks.

Why companies sell shares

You may wonder why a company would want to sell its stock to the public. The reason is because it needs the money to cover start-up costs or to expand the business.

Of course, it could borrow the money from creditors (a process known as debt financing), but doing this means it will have to pay back the money with interest. The quickest way to get the money with fewer strings attached is to sell shares.

Selling shares raises the money a company needs fast and with no requirement to ever repay the money. Companies are only expected to share a portion of their profits with shareholders.

Even better, selling shares distributes the risk of doing business among shareholders. This means that even if the company experienced huge losses, the founders would not bear the loss alone.

Understanding the stock market can be intimidating if you are a new investor, but it can help you better manage your finances and investments in the stock market.

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