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Stock Market Investing ? The Basics
Stock markets allow you to buy a small portion of a company (called a share). You'll get a proportional share of the revenue generated by the firm, and be able to vote in the company's elections on choosing its board of corporate governance, selecting its Chief Executive Officer and Chief Financial Officer.
A publicly traded company is one that has its shares of stock traded on a stock exchange, like the Dow Jones Industrial Average, or the New York Stock Exchange. Publicly traded companies have significant burdens of public disclosure to live up to, mandated by the Securities and Exchange Commission (SEC). The SEC mandates that financial reports maintain a certain level of transparency, and appropriate disclaimers.
Not all funds are publicly traded ? for example, purchasing shares of Berkshire-Hathaway, Warren Buffet's holding company, can only be done by contacting the company directly.
When investing in stocks, there are some very basic principles to keep in mind. The first is that there are two strategies ? buy and hold (Buffett's strategy) and buy for resale (which is speculation that a stock's price will rise in the near term, allowing you to sell it for more than you paid for it.) Both of these are regulated by the Price to Earnings Ratio. Take the average annual earnings of one share of the stock, and figure out how many years of earnings it would take to equal the purchase price of one share. A classic good P/E ratio is one that's under 10 ? ten years of earnings will equal the value of one share of a stock. This fundamentally regulates the perceived value of a stock ? a stock with a higher P/E ratio than 10 may be one that's overvalued by the market, or it may be a company with huge growth expectations (such as Google).
Stock prices change over time ? in the long haul, decades or more, stocks out perform most other investment vehicles by a significant margin, and automatically index for inflation. However, on a quarter by quarter, or year by year average, stocks will have a lot more variance, and changes in corporate governance, a bad market decision, or just changing demographic trends can make a stock's price fluctuate wildly.
One way to manage stock volatility is through an investment vehicle called a mutual fund. A mutual fund is, in essence, buying a share of a company that buys lots of shares of stock, paying a fund manager a very large sum of money to pick stocks carefully and manage your investments for you. The aim of a fund is to build up stock diversity, so that a downturn in one sector of the economy doesn't wreck your investment in short order, and funds are generally broken into categories by their relative risk, from growth funds that are fairly risky, to wealth preservation funds that hold on to companies with nice, steady earnings ratios.
Stock Markets If you want to discover your pot of gold in the stock market, then you have to know it inside out. And for all the inside-out information on the stock market explained in simple, concise, layman terms, all you need to do is click on this link: Stock Basics.
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