Demystifying the Stock Market

Introduction

The stock market has a reputation for being intimidating and confusing: it’s vast and filled with complex numbers, charts, graphs, and financial jargon. However, through the veil of numbers and complex structures lies a system that has worked for centuries. In fact, the first stock market was the Amsterdam Stock Exchange, created in Amsterdam, the Netherlands in 1611 by the British East India company. 

What is it?

So, the question begets us all: what is the stock market? In its fundamental principle, a stock market is simply where prospective investors buy and sell shares, or parts, of publicly traded companies. In other words, the stock market is a place where investors can buy and sell shares of ownership in public companies. In this article, I will talk holistically about American stock exchanges, the main ones being NYSE (New York Stock Exchange), and NASDAQ (National Associations Securities Dealers Automated Quotations. 

But before I get into any of that, the first question to answer is, why does anyone invest? The answer is quite simple: someone invests when they want to build up wealth and generate income based on acquiring an item. For example, if I were to buy a house, I am purchasing something that (hopefully) grows in value so I can sell it in the future for a profit. The stock market is another way to invest your money, except instead of buying a house, you buy shares in a company. These companies have to meet a few standards, the main one being that they have to be a publicly traded company. Though there are tons of steps in the process to becoming a publicly traded stock, once a company goes public, they will inevitably get accepted to one stock exchange or another. Ultimately, a public American company’s goal is to become a part of the NASDAQ or NYSE stock exchange— the two biggest stock exchanges in the US. However, the process isn’t easy: big companies like Microsoft, Amazon, and Apple may be on these exchanges, but it takes years of growth and popularity to even be accepted into one of these exchanges, let alone popularly traded amongst them.

Why should YOU invest in it?

Now that I’ve covered the very basics of stocks, the real question becomes: why should you invest in one? There are a couple unique facets to stocks that are not available in other forms of investment. First is their long term potential. Historically, patterns show that equity returns such as investing in companies show better returns than more cash fixed investments such as bonds. Although there may be short term fluctuations in share prices, stocks trend upwards in the long term, making them a reliable investment. Secondly, a stock’s ability to protect. Inevitable economic factors such as taxes and inflation will always impact your wealth and money, but equity investments such as stocks allow investors to protect their profits while their money is still in the market, in turn mitigating these negative economic effects. Thirdly, a stock’s ability to maximize. Companies often pay shareholders—or investors—special distributions, otherwise known as dividends. When companies have excess profits, they often return it to investors. This allows for greater returns on your investment and incentivizes others to purchase that company’s stock. 

Conclusion

Though there are tons of more nuanced and technically advanced factors that should be considered in the stock market, this information should provide you a basic understanding of the market and help you develop your own investment strategy in the future. The best way to invest —especially in a medium such as the stock market— is to develop your own strategy of what works best for you. Preliminary research allows you to explore more on your own and lets you to develop strategies that in turn, will make you most comfortable with your money and your investments. 

Approaching the market as a beginner can feel scary, but by starting small, diversifying your investments, and sticking to a plan that works for you, you will begin to understand stocks and how to make them work for you. Even small investments today can yield massive returns in the future!

Equipped with this introduction, you should now have a basic understanding of how to demystify the stock market. With time and experience, your confidence and comfort level can grow. So don't let the initial learning curve stop you from exploring stocks as part of your wealth-building toolkit in the future.