Financial Planning

This is part one of the series How to Invest in Stocks.

If you want to build wealth, you must understand how the stock market works. It’s literally one of the most important financial topics you will ever encounter. This article will explain how the stock market works. It’s essential to understand the root of the system in order to master the system.

What is a Stock?

A stock is a single share of ownership in a business. For example, Google has 314.8M shares available to purchase. This means if you buy one share of Google stock, you own an very small portion of Google — but you would still partially own the company. The more stocks you own, the more of Google you own.

In 1789, the New York Stock Exchanged opened, allowing anyone with a bit of money to invest in businesses. That’s the beauty of the Stock Market — almost anyone can participate.

Contrary to popular opinion, stocks and investing aren’t just for the middle and upper classes. Single shares can be cheap (literally pennies) or expensive (tens of thousands of dollars). Anyone can invest.

Why Buy a Stock?

Before doing anything, one must have a justification. So why buy a stock? What’s the point? The purposes of investing in stocks are:

• To not lose money. Inflation eats your cash away; every single paper dollar is worth less every day. Investing and expanding wealth is the best means of combating inflation. As inflation continues to get worse, this will continue to rise in importance.

• To make money. The stock market, if played right, is lucrative. You are buying a portion of a business. You can make money both through extra profits that the business makes (often paid to stock holders through what’s called “dividends”).

If you invest in a good stock, you can literally double your money in less than a decade. Think long term and you’ll do fine.

The Money Flow

Investing in stock is all about the value changing. The idea is that the stock you buy will be worth more with time — enough to both offset inflation and to earn a buck. The ultimate goal is to find a stock that is cheap and explodes in value.

Of course, this begs the question, and leads us to the next part in the series: Why do stock prices change?