Investing 101: Understanding the Stock Market
Investing is a critical part of building wealth. As a nurse there are important opportunities that you may not be aware of, because it feels like you are having to give every bit of the energy and focus you have, to your work or demands at home all the time. I get it.
My hope is that with this short article I will be able to help make learning about financial investing opportunities a little easier. The purpose of this article is to help you better understand what investing is, and where people generally invest their money.
Please note that we are not in any way providing any recommendations on what investments you should or should not make personally. For more direct financial advice on how these principles apply to your unique situation, please contact us for a free consultation.
What does “investing” mean?
Making an investment means contributing money toward something for the purposes of gaining profit. Profit is the growth of your money: having more money at the end than what you started with.
Understand that with investments you are taking a risk with your money, in order to build a profit of some significance. Note that there is always risk involved - this is important to keep in mind.
We can understand risk as the chance or probability of something happening with your money; including the possibility of losing some or all of your investment.
Stock: a type of investment
We’ve all heard of trading stock as an investment strategy, but what does this mean exactly?
Stock a.k.a “Equity”: is the partial ownership of a company. Each stock you have is called a share (1 share = 1 stock). A stock is a type of ‘security’. In very basic simple terms, a security is something that you can trade on the stock market. So all stocks are securities, but not all securities are stocks.
Stocks are bought and sold on what are called ‘stock exchanges.’
Usually, stocks serve the purpose of helping a company to raise funds to operate a business. As investors start buying stock of a given company, they have to pay money to buy the stock. The company is then able to use the money in exchange for partial ownership of the company.
The most basic explanation is that you are buying and selling stocks in hopes of making a profit. So you are investing money into those companies, in hopes that the stock price goes up, which means that the value of the company went up.
To give a simple illustration, if I’m buying a stock and it costs $10 per share, and the price of the stock goes up to $20 a share, I have just doubled my investment. So if I bought 100 x $10 = $1000, and the stock goes up to $20, my money is now at $2000. Which equals a profit of $1000.
What is Short Selling?
In general practice, you buy stock in hopes of the price going up, however you can also predict a stock that is going to go down, and also make a profit! This is called short selling a stock. And most people don’t know this is a thing.
Just note the main difference is that when you are short selling, you’re hoping that the stock price goes down.
An interesting thing about stocks is that you don’t always have to purchase stocks with your own money to turn a profit on the stock exchange. You also have the ability to borrow stocks from companies. Meaning you have to return them back at some point.
To short sell, you can borrow a stock from a company, sell it at a higher price, and buy it back at a lower price when the stock goes down in value. You keep the difference, and return the stock back to the original company.
This allows us to make money if we are able to predict a specific stock is going to go down in price. So for example, say you borrow stock at $50 and give it back when it goes down to $35, you’ve just made $15.
Things to note: When you borrow stock you have to give back the same amount of shares you borrowed. The risk for you in short selling is that you need to sell the stock, and then buy it back.
Big disclaimer! Trying to time or predict the ups and downs of stocks is tricky business. And so we do not recommend that anyone try to do this without significant experience, or with the assistance of a professional.
Other Good to Knows
Here are a few more concepts and terminology that will be helpful for you to know as you step into this realm of investing.
Stock option: gives investors the right, not the obligation to buy or sell a stock at an agreed upon price and date. Options are diff from normal stocks. One contract represents 100 shares of the stock
Contract: as it related to stock options, a contract is the number of options a trader is looking to buy
Put: betting that a stock will fall in price
Call: betting that the stock will rise
So there you have it, the introductory basics you need to get you started on the path of learning about investments on the stock market.
If you have any more questions, please feel free to reach out to us anytime to book an appointment!