At DreamWork Financial Group, we believe that an informed investor has a better chance at success. That’s why we strive to explain complex financial topics, dissect commonly used jargon, and help investors feel confident in their financial decisions.
One of the most common questions we get is “how does the stock market work?” So, this article will seek to provide a brief overview of the stock market and how you can take advantage of the opportunities it presents.
What is the stock market?
The term “the stock market” can be misleading, and that’s because it’s not a single place. Instead, “the stock market” typically refers to a network of regulated exchanges where investors can buy and sell ownership of publicly traded companies, represented by shares of stock.
There are four main participants in the stock market:
- Companies: Businesses who sell a portion of their company to investors in the form of stock shares.
- Investors: Individuals and investment companies who trade shares of stock with the intention of making a profit.
- Exchanges: Organized marketplaces that connect buyers and sellers to facilitate trades.
- The U.S. Securities and Exchange Commission [SEC]: The governing body that regulates the issuance, purchase, and sale of securities, including stocks.
When these groups come together, it creates an orderly marketplace where companies can raise the funds they need, regular people can easily buy and sell a portion of a company, and regulators can ensure that all transactions occur above board.
How does the stock market work?
Stock markets work by creating a regulated marketplace where investors can buy and sell corporate equities – a.k.a shares of stock. These shares represent partial ownership in the company that issued them. Once a business has issued stock, it becomes a public corporation – because it is now owned by the public. Shares of the company are then bought and sold on “the stock market” by investors who are trying to make a profit.
Businesses Issue Stock
When a company needs to raise funds, they have several options such as borrowing from a bank through a loan, borrowing from investors through bonds, or selling a portion of the company through stock. If the company decides to issue stock, they typically hire an underwriter or investment bank to set up an initial public offering [IPO] – the creation and sale of new shares of stock. During the IPO process, the company decides how many shares to issue and at what price. Once those decisions are made, the company files with the SEC.
After the SEC has reviewed the IPO information, the shares can be sold to large investors like mutual funds, hedge funds, and pension funds at the pre-determined price. This initial stock sale typically occurs before shares are available to the public. However, there are some rare companies who offer shares directly to the public in their IPO.
Investors Buy Shares Through Stock Exchanges
After the IPO, shares can be bought and sold by the public on one or more stock exchanges. Often, the price that private investors pay for a stock is dramatically different than the price set during the IPO. This is because the shares are sold at a market price based on supply and demand.
Investors Sell Shares on the Secondary Market
Once investors buy shares, they can hold them or sell on a stock exchange. The buying and selling of stock shares on exchanges after the IPO is referred to as the secondary market.
Whether you choose to hold shares for the long term or sell them on the secondary market will depend on your individual goals. Often, these actions are tied to how you plan to profit from your stock investments.
How do investors make money in the stock market?
There are two main methods for making money in the stock market: sharing in company profits through dividends and selling a stock for more than you paid for it.
Dividends
Dividends are payments companies make to shareholders to distribute earnings. If a company you own pays regular dividends, you could receive steady income.
Price Growth
Stock prices change constantly based on supply and demand. If you buy a stock when its price is low, and sell it later when the price has risen, you can make a profit.
It is important to remember that dividends are not guaranteed, nor is growth. Some companies don’t pay dividends, and there are many factors that could cause your shares to lose value. That’s why it is important to make careful decisions and have an experienced financial advisor on your side to help you choose investments.
How can you invest in stocks?
To invest in stocks, you will first need to decide if you want to trade on your own, or partner with an advisor. This will help you determine which investment company to work with.
If you have the experience to choose worthwhile investments and plenty of time to place trades, you may consider managing your own investments. Many investment companies offer “self-managed” accounts for this purpose. With this type of account, you typically pay a fee for each trade you place. In addition, you may be charged an annual account fee and fees for receiving your statements and tax forms by mail.
If the self-managed route isn’t for you, a trustworthy financial advisor can assist with choosing investments and placing trades. When you work with a fee-only Registered Investment Advisor [RIA] like DreamWork Financial Group, you only pay a set annual fee based on the size of your account. These types of advisors also have a fiduciary duty to act in your best interest all the time, so you can rest assured the advice you receive is genuine. You may think that financial advice is only for the rich, but with DreamWork Financial Group, You Don’t Have to Be Wealthy to Have Wealth Management®.
Invest in Stocks with DreamWork Financial Group
With Investing Gameplan™ by DreamWork Financial Group, investors can access custom portfolios, fiduciary advice, and a wide range of investing strategies. Best of all, there is no account minimum to participate in Investing Gameplan™.
All our clients receive personalized service and a wide range of investment options such as ETFs and individual stocks. To learn more about DreamWork, or to get started with Investing Gameplan™, contact us today.