Stock market for dummies: what you need to know about investing

Just how does the stock market work? What are stocks in the first place? These are the kind of questions that will be asked by newbies when trying to find out more about stock markets. The fact that books such as ‘Stock market for Dummies’ exists proves that the writers of that series of books knew that there was a lacuna to be filled. So let’s try and address the simple concepts as easily and clearly as we can.

What is a stock?

A stork brings babies to your house. Stocks give you dividends normally and represent ownership of the company. See, they would never put it that way in ‘Stock market for Dummies’ and I’m sure you’ll remember that example forever now. As an owner of a company’s stocks, you will be known as a shareholder or a stockholder. You get a stock certificate and a small trophy for owning stocks. Okay, I made up the part about the trophy, but you do get a certificate. Seriously.

So why do companies issue stock?

That’s actually pretty simple; so that they can raise money. Of course, they can also take a loan from someone, but that carries interest charges that have to be paid. With stocks, you pay out dividend and only as much as you want whenever you want to.

Why own stocks?

If you own stocks of a profitable company, you can sell it off for a profit or earn dividends from the company. Dividends represent a share of annual profits, but not all companies pay this out. Growth stocks pay no dividends while income stocks do.

How does the stock market work?

Stocks, bonds, securities and commodities are bought and sold in stock markets. This is done either physically or virtually.

But aren’t the markets in a meltdown?

That is a cyclical thing. Much like demand and supply decide prices in the real world, a surplus of demand bloated prices in the stock market. People realized that and tried to get out, causing a meltdown. Stock markets are volatile, but can provide fantastic returns over a shorter period of time or a longer period of time.