The stock market has for decades been a goldmine where miners with the best tools reap big while those without the right tools go home with their heads down and their backs bent. So profitable has investing in stocks been that it has produced spectacularly wealthy individuals.
One such tool required to excel in the stock market is accurate and reliable information.
So if you are just starting out, we at Alinea Invest recommend that you first understand clearly what the stock market is before proceeding to the important question- how does investing in stocks work?
We have prepared an insightful article that will give you the basics of how investing in stocks works and how you can stake your claim to be the next oracle. Dig in!
Stocks are mainly categorized into two:
Ø Common shares
Ø Preferred shares
As previously noted, having stocks in a company denotes an ownership stake in that particular entity. However, how does stock trading become a profitable venture that generates revenue for people? How exactly does investing in stocks work?
The explanation behind how investing in stocks works is very simple. The capital required to set up and operate a corner store may be easy for the owner to raise alone or with the help of a few business partners. This is what is oftenly known as a sole proprietorship.
In the case of sole proprietorship, there is no distinction between the ownership and the business entity. Rather, the owner is solely responsible for the assets and liabilities of the business. The implication of this is that there is no share ownership of the business.
However, in other cases, a business may be too large for the founder (s) to raise the capital required to operate it alone. For instance, an automobile manufacturing business, technology startup, or large commercial banks require large capital outlay to operate.
Therefore, when starting such businesses, the founders may seek funding externally from angel investors, venture capital firms, and the public. The startup gives these investors a slice of ownership in it in exchange for capital required to fund its operations.
It is this ownership stake that is denoted by stocks or shares. So once the company sells shares to investors in an IPO (initial public offering), the investors get entitled to a share of the company’s profits through annual dividends.
Based on various factors such as technological innovation or financial performance, investors are then able to speculate on the company’s intrinsic value. This results in movement in the prices of a company’s stock.
This speculation is what investors aim to benefit from when investing in stocks. They buy a company’s shares at a lower price and then wait until confidence in the company’s future earnings goes up before selling the shares at a profit. This is essentially how investing in stocks works.
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