Saturday, March 3, 2012

How stock market works?

Most new investors have thought of stock market to be added in their portfolios. But many may have felt that it’s like a legalized gambling. We see it as this : Men and women place their bets by choosing a random stock. This may be based on their gut instinct and water cooler chatter. When the price of the stock you chose rises, you win! If it drops, you lose! More of driven by luck, isn’t it?  This has become the reason for many people who got rich in an instant and lost their retirement savings the next day.

Unfortunately, this is how new investors see the stock market—a short investment. But then, it takes time and the will to learn about stocks to understand more the truest nature of stock market investment. If you carry on a positive attitude, you’ll get better and smarter in managing your money.

So, let’s start by defining what a share is. It is literally a share in the ownership of the company. When you buy a portion of the stock, you are entitled to a small fraction of the assets and earnings of that company. Everything the company owns may it be buildings, equipment, or trademarks are part of the assets. The earnings comprises of the money brought from selling products and services.

The reason most companies share their assets and earnings with the general public is of course, they need money. Companies rely on two ways in raising money. The first one is through borrowing or debt financing. The second one is selling stock or equity financing.

The latter is the best option. Through this, the company gets money with lesser strings attached. There would no interest to pay and no requirement to pay the money back. But this is just basic information, more can be learned from experts.