I believe my first memory of the stock market was an episode of Friends of all places. In the episode Monica, becomes addicted to the stock market after seeing her stock go up slightly she begins a rampage of buying and selling stocks. After enjoying some early wins she begins to face the inevitable downswing that comes when picking stocks based purely on their name. We watch as Monica grows more desperate at facing the reality of not being becoming instantly rich after buying and selling a few stocks shortly before she loses it all. With this being my first memory of the stock market it gave me a very clear message. The stock market is a place where suckers lose money.
If given the title you have come to learn about what is the stock market and my initial anecdote has confused you, I apologise. I will now attempt to explain the stock market from an absolute ground zero approach. It may also help to read my other article “What is money?” to give you a grasp on commodities and how we value them.
Example of a stock
Lets say you own a burger restaurant, you’ve had this business for a couple of years now and you would like to expand to other cities and grow your business but this requires a lot more money.
In order to raise the money you seek to sell off a part of your business by getting others to invest in your business, you call this portion of the business a “share” and you can now call the investor a “shareholder”.
With the money you decide to expand the burger restaurant to other cities and so your profits are now much larger so now your business is worth a lot more money if anyone wanted to buy it. Also if anyone wants to buy your business they may also need to buy the share from you investor shareholder and because the business is worth a lot more money now the investor is able to sell his share for a lot more money than he initially invested. This is a very simple version of what a stock (share) is.
Shares in the real world
In the real world when a company wants to raise funds in this way they do it via a process called “initial public offering” or “IPO” – when this happens they do not create one share of the company they create thousands or millions, each one representing a small piece of the company. Virtually all the big companies in the world have done this, Facebook, Google, Tesla, Microsoft etc. They have all split their company up and allowed other people to buy parts of their business in order to raise funds to expand the business.
Once the IPO is completed the company will now likely have a lot of money that they can now re-invest or reward the initial company founders and there are thousands or millions of people who are now shareholders. In order to make sure the shareholders are rewarded for there investment the company must put in place a board of directors who will be responsible for ensuring the company is making smart decisions with its money and will be responsible for hiring and firing the CEO of the company. Think of the CEO as the boss but the board of directors as the bosses boss.
Being a shareholder of a company means you can vote on the directors that are nominated to the board as well as other business decisions, these votes are based on the % of your shareholdings so if someone has 51% of the shares they will be able to win any vote because they have the majority of the votes.
So, what’s the Stock Market?
The Stock Market is exactly what it sounds like, a market for all the stocks and shares of all the different companies that exist.
There are a number of different market places where stocks are listed, these are called the exchanges, but they are all mostly accessible through Stock Brokers. Think of a Stock Broker as a middle man between you and the company. Here is a list of the Top Stock Brokers in the UK where you can begin to invest in the stock market.
How does the Stock Market work?
The Stock Market is designed to be a secure and trusted environment for individuals or corporations to Invest in Companies they believe will have a good future and thus provide them positive returns on their investment.
There are a couple of ways in which a person will be rewarded for their smart investment choice, either the stock price will keep going up after they buy it and they can sell it for a profit, or the company will issue something called a dividend and the investor will be paid money simply for having the stock.
That’s right – if you are the owner of a stock that pays dividends (most of the best ones do) you will be paid a portion of the companies profits just for being the owner of that stock.
When should I invest in the Stock Market?
This is really a personal decision but the general idea is you should be investing in to the stock market as soon as possible, the earlier you can invest the more time your investment has time to grow.
Also due to something called Compound Interest the more time you money is left to grow, the end value becomes exponentially bigger. Compound interest is an interesting one to get your head around but I promise you once you realise how powerful it is it will change your entire perspective on investing and money. Watch this short video for a quick explanation on compound interest.
Is it too late to start saving?
Absolutely not! No matter where you are in life you are never too late to invest, also living in the UK if you have a job you are very likely already enrolled in a pension scheme and therefore already Investing in the Stock Market. Check out our post about pensions for more information on those.
If you want to start investing the most common thing for people to do is to open something called an ISA account with one of the top Stock Brokers and begin investing whatever you can spare and letting it grow slowly over time. An ISA account will let you save up to £20,000 annually tax free. (Yes if you make profit from the stock market you will be taxed, but you are shielded from tax in an ISA account)
Obviously the earlier you can start the better and the more you can invest the better but the key is to get started when you can and save as much as you can.
How do I know what to invest in?
Again this is a personal decision, but the most common advice you will find is to invest in things called ETF’s these are Exchange Traded funds, they are bought and sole on the stock exchanges just like any other stock but they represent a number of companies so buy buying 1 share of an ETF you are actually buying 50 small shares of 50 companies.
Investing this way is generally seen as a safer way of investing as if one company in the ETF performs badly the others can help make up for it. Also the ETF’s are managed assets meaning there are decisions around what companies are included in them and not so it’s usually a combination of the best companies you can possible invest in.
Here is a short video of Warren Buffett (One of the most successful investors of all time) explaining why you should invest in the S&P 500 (probably the most well know ETF that is a collection of 500 companies).
Important to Remember
The Stock Market is a temperamental thing, it is very much driven by people and their emotions, as we saw during the Corona Virus pandemic and after the Russian invasion of Ukraine. The prices can go down as well as up.
If you’re investing in the Stock Market you need to have a long term vision – you should be investing for a minimum of 5 years with the longer time frames being 25-35 years.
The longer people are invested the more likely you are to make a profit and the easier it is to ride out the ups and downs. Just look at this graph of the overall stock market since 1825. Although there are ups and downs the overall trend is for the prices to go up. As well as the added bonus of receiving your dividend payments.
Why should I invest in the Stock market?
This is fairly simple, unless you are lucky enough to have a constant stream of income from other sources such as property or a business you’re probably going to want to invest to allow yourself to retire later in life.
Saving your money in your bank isn’t good enough, due to inflation and very low interest rates in the bank your savings will become less and less every year. You can read more about inflation here.
Please check out my other posts if you found this information helpful and feel free to comment or send me a message if you have any questions or critiques.
