For the longest time, investing felt very unreachable and extremely difficult for me to understand. Not only was it dominated by the “finance bro’s”, the language sounded very complicated and if you did not study economics, it seemed like something you simply were not meant to understand.
But here’s the truth, stocks are simpler to understand than they look. Once you understand the basics, you realise investing is not a mysterious finance-bro club, it is just a way to grow your money and get it to work for you.
Let me break it down for you.
Basic Terms Explained
So What is a Stock?
- Private Company: A private company is owned privately by the owner, early investors etc. Think of it this way, you and I open a coffee shop (because we’re besties of course). Right now it belongs to just us and maybe a few other friends who helped us fund it. At this point it’s privately owned by us.
- Public Company: Say we then decide to expand to more locations, hire more staff, or even just become a much bigger company than we already are, we would need a wholeeee lot of money. To raise that, we can decide to sell small pieces of our company to the public. This moment is called going public (the official term is called IPO but that’s for another day). Those small pieces are called stocks.
Remember earlier, we decided to sell small pieces of our company to the public? Yeah so think of it this way. Our company is a big cake that we’ve decided to slice up and sell. We can slice it up to thousands sometimes even millions of tiny pieces. Those cake slices are called stocks.
So when people buy stocks, they are basically buying small pieces of that company. That means if you buy let’s say Apple stocks, you own a piece of Apple. Definitely not enough to walk not the office and give instructions but enough to benefit if the company grows.
So Why Buy Stocks?
Simple. You benefit if the company grows. Meaning, your money grows alongside the company. There are two main ways money put in stock can grow
- The Stock Price Goes Up: Let’s say you buy a stock (one slice of the cake) for €10. If the company grows and the stock price grows to say €20, your investment has doubled. If you decide to sell at that point, you’ve made profit.
- Dividends: Some companies share part of their profit with investors. This is called dividend. So even if you don’t sell your stocks at that point, the company basically pays you for owning shares. (that’s amazing isn’t it?)
Why Do Stocks Go Up and Down?
This is the million euro question. The answer is simple; supply and demand. The law of supply and demand says the higher the demand, the higher the price and the lower the demand the lower the price. That applies here. If lots of people buy a company’s stock, the price of that stock goes up. If people start selling, the price goes down.
Things like company performance, economic and political conditions, investor conditions and news affects the movement of stock prices.
It means if a company launches a successful product or reports great profit, people often rush to buy its stock.
Wrapping Up Now…
Stocks can sound intimidating but the basic idea is simple. When you buy a stock, you’re buying a small piece of a company (like our coffee shop). Once you understand that, the whole concept becomes easier to understand and less complicated.
But this is just the foundation.
In Part 2 next week, we’ll talk about one of the biggest myths about investing; the idea that you need a lot of money to start. We’ll also talk about how beginners actually get into the stock market.
That’s all for today bestie. Same place next week.
