Most people recognize that the most practical way for middle class America to make a fortune is either in real estate or stock market trading. Unfortunately, while most people understand how to make money in real estate few have the money, and likewise while most have the money to make a fortune in stock market trading few understand how it works.
This article is geared towards those who really don’t know anything about the market, so please excuse me if you’re an experienced trader and I over simplify things. Let’s start with the basics. What is stock and how do you trade it? “Stock” is actually a partial ownership in a company. What you actually buy is a share of that ownership. Let’s say a company divides its assets into 100 equal shares. If you buy 1 share you technically own 1% of the company.
That share also gives a 1% vote in how the company does business. The cost of that share is determined by the market’s perceived value of that share. Since a company’s actual assets and liabilities is fluid the price doesn’t actually represent the actual worth of that share but rather what a buyer is willing to pay for that share. If the company makes a profit; the profit is equally divided among all shares minus any money the board decides to reinvest into the company or keep as an asset. These are called dividends.
Since most companies issue millions of shares of stock, your actual vote is pretty meaningless since a core group keeps enough of the company’s stock in their own personal control so they will have a majority vote on all company decisions. The real reason that you want to own stock is to collect those dividends or to sell your shares when the price of the shares increase, thus making a profit.
All stock market trading is done through official stock exchanges. The actual buying and selling is performed by stock brokers who are allowed to trade in the exchanges. Every time you buy or sell stock these brokers take a percentage, a flat fee, or a combination or the two. This where the smaller investor is at a disadvantage over a larger one. Let’s say you want to own 1000 shares of XYZ, but you can only afford to buy 200 shares at a time. You have two choices: either make 5 separate purchases and pay the fee each time or save up enough to buy all 1000 shares and hope the price doesn’t go up too much in the meantime.