How Does the Stock Market Work?

How Does the Stock Market Work?

Well-known billionaires like George Soros and Warren Buffet have made part of their money through the stock market. Nathan Rothschild and other notable members of the Rothschild family generated a substantial portion of their wealth through it as well. Consequently, many people want to know how they can use the stock market to become as rich as George Soros or Warren Buffet. Well, the first step in understanding how does the stock market work is to know what a stock is.

The Stock Market – A Detailed Explanation

A stock represents your share of the ownership of a business. You can buy this share during an Initial Public Offer (IPO) that advertises its availability. The company keeps your money using it for internal and external processes. You can trade your share in the ownership of an enterprise. This trading takes place on a stock exchange platform such as the NYSE (New York Stock Exchange), LSE (London Stock Exchange), TSE (Tokyo Stock Exchange, and the SES (Stock Exchange of Singapore) among others.

Making Money in the Stock Market

Interestingly, a company that trades its shares on these stock exchanges does not receive the proceeds that result from these transactions. Instead, these profits go to the person who sold his shares while the money for buying them comes from investors who feel that having shares in the firm is worthwhile. That is how you make money on the stock market. More specifically, you buy shares into a company at a low price. Then you sell it to someone else at a higher amount than the one you paid for it.

For example, someone who bought Facebook shares during its Initial Public Offer bought it at $38 per share. The company raised $16 billion through this IPO after offering investors 421, 233, 615 shares. Currently, Facebook trades on the NASDAQ Stock Market under the acronym, FB. Each share is worth $184.59. That means a single Facebook share bought during its IPO would have earned you a profit of $146.59. To put it differently, 10, 000 shares only would have led to $1, 460, 000 in profit.

Another way of making money on the stock market is by buying shares while they are low and then waiting for them to rise. For instance, Facebook stocks hit a low of $17.58 in September 2012. Buying them at that time would have given you a profit of $167.01 for every share translating into a net return of $1, 670, 000 for 10,000 shares. That is how some people get rich quickly, i.e., by trading in stocks strategically so that they can make handsome profits in future.

Warren Buffet Tips on Investing in the Stock Market

Investing in the stock market is a risky endeavor. Making loads of money is possible, and losing it is possible as well. You have to think and act wisely for you to profit from it. Warren Buffet has some tips that can help you if you want to invest in the stock market. The first one is to think of stocks as a long-term investment instead of a short-term concern. Then, do not invest in this market with borrowed money. Finally, Buffet says that avoid high-fee investments is an excellent idea. Follow his advice for the best returns on your stock market investment.

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