A quick overview
Before you start on your investing journey, you need to know what stocks are and what your goals are!
Let’s go through each of them one by one.
What are stocks?
Stocks are like a partial share of ownership in a listed company, companies that are listed on stock exchanges such as the NASDAQ and NYSE. So when you buy a stock, you are essentially buying a piece of a company’s success or failure which is measured through its net income generated.
A stock’s price is not constant. It changes based on the number of market participants (traders/investors be it sellers/buyers) who are trading the stock. If the number of buyers is greater than the number of sellers, the stock price increases, and if the number of sellers is greater than the number of buyers, the stock price decreases. Hence, the market price of the stock reflects the perceived value of the company or in other words, what they believe the company is worth. Because of that, if market participants believe that the company has the potential for growth due to maybe approval by FDA or have just reported earnings greater than its forecast, the stock price could increase dramatically and vice versa. Maybe WallStreetBets have taken an interest in the company and drives the stock price up? Many things can affect the stock price!
Why invest?
There are many reasons why market participants would want to invest. Some invest for the short-term fluctuations in prices, trying to gain that short-term profit. Others invest for the long-term believing that the value will rise over time. Others try to “beat the market”. Others may want to obtain a controlling percentage of ownership in the company. But most importantly, people invest to make money!
What does “beating the market” mean? It refers to earning a return on your investment that is greater than the S&P 500 index, a market-capitalization-weighted index of 500 of the largest companies in the United States. So the index holds a greater percentage of companies with greater market capitalization. This widely benchmarked index has generated an annualized average return of 10% since its inception!
So if market participants want to “beat the market”, they will have to earn at least 10% or greater on their investments annually!
Type of Investors
There are mainly two types of investors. Active investors aim to exploit the short-term fluctuations in stock prices as they believe that the market is inefficient whereby companies are perceived to be valued wrongly or there are developments (earnings release, FDA approval, stock repurchases) that will impact the stock price. They are called active because a lot of work is put into finding and picking stocks to analyse.
There are also passive investors who believe in the power of long-term and no BS investing. They believe that although the market has its inefficiencies in the short-term, over time the market will correct itself and companies will be properly valued and their investments will eventually pay off.
Conclusion
Before you begin your investing journey, please do research!
Thank you all for reading! :)
