The stock market is, undoubtedly, the best place to become wealthy. This is where one can invest and save money for the long term. You would have probably read about how someone made millions from their investments in the stocks and wished you could do the same.
A financial literacy quiz was conducted by an agency, and, shockingly, only 24% of young Americans passed this test. This shows that people are not aware of what the stock market is. Most people think that understanding the stock market is complicated, but this article will help you understand the basics you need to know.
What is the stock market?
It is a place where one can buy and sell the shares or equity of a company. There are stock exchanges like the New York Stock Exchange and the NASDAQ where you can buy shares of the companies listed on these exchanges.
Why buy in the stock market?
When you buy shares in the stock market, you can sell them later to make a profit. Let’s say you buy the shares of company ABC for $50 per share. Also, assume that you invest $5,000 in the stock market, which means you get 100 shares.
The shares of a company keep going up and down in the stock market, which means the prices fluctuate. The variation in price takes place based on demand. For example, the company may come out with a new and innovative product that can help it increase its business in a big way. In such a situation, there would be a demand in the stock market for shares of this company and, consequently, the prices go up. Assume that the price goes up to $70, which means you can get a profit of $2,000.
This way, you can earn money from the stock market. If you are investing for the long-term, the price of the shares you buy can keep increasing. From $50, it may even shoot up to $500 in some years. In this case, you can get a profit of $45,000.
Are there any risks involved with this investing?
In the mentioned example, shares were bought at $50. A few days after buying the shares, there may be some bad news about the company. For instance, a product it released in the market may have failed, and the company management may be under investigation for committing offenses.
In the case of any such bad news, the market reacts strongly. Those who own shares start selling them, and the share prices start falling as more people sell their shares. Within no time, the value of the shares you bought may be down to $20. This means you ended up making a loss of $3,000, which is a risk you might face.
Being informed about the stock market helps you prepare for such risks. When your investment in stocks is long-term, you have a great opportunity to build wealth.
