Discover why stocks are seen as a reliable and often rewarding investment. Learn how the stock market operates from a high level and also how supply and demand characteristics dictate prices. Learn about the potential risks and benefits from stock investing and gain insights to start the journey to determining, if and how stocks play a part in our overall financial portfolio.
Welcome to the next lesson.
Stocks.
Investing in the stock market is considered a wonderful investment, and there are many people out there who touted as very safe, passive, and strong returning investment. For anyone unfamiliar with the stock market, it’s a dynamic marketplace where investors can buy and sell ownership shares in publicly traded companies. Some of the biggest companies we know in our everyday life are publicly owned and therefore traded on the stock market. It serves as a central platform for companies to raise capital by offering ownership stakes, known as stocks or shares, to the public. In return, investors become partial owners of the company and have the potential to benefit from its financial performance, growth, and profits.
The stock market operates through stock exchanges, which are organized markets where buyers and sellers interact to trade shares. These exchanges enable investors to purchase stocks from companies seeking capital and to sell their own shares to other interested parties. Stock prices are determined by supply and demand dynamics, just like so many other things in life. When there is high demand for a particular stock, its price tends to rise and vice versa.
So needless to say, if a publicly traded company goes out of business and you own their stock, that stock becomes worth zilch, not a Zippo, $0 and you get nothing except for a loss on your tax return. The shares that you owned basically evaporate and have no utility. You cannot go live in your valueless shares. You cannot rent them out to someone else to live in and you cannot sell them for scrap. I know because it’s happened to me on multiple occasions. I seem to have a knack for picking stocks that then go out of business, which is why I’m not a big fan of gambling.
But again, I digress. The opposite is also true for stocks. When companies are doing very well, then the value of the stock goes up, and you have the opportunity, if you sell at the right time, to make great returns on your investment. And you don’t have to do anything for the value to go up or down, unfortunately. So you as the individual owner have very little say in how the company operates, its earning potential, or the decisions being made. Yeah, you can likely cast votes at shareholder meetings, but it’s likely that the portion of the company that you own via your stock portfolio is quite small compared to the overall size of the company. So for all intents and purposes, you as an individual really cannot affect change. Hence the reason stocks are considered to be a very passive investment. You can often set it and forget it. So a few pros and cons about stocks that I want to walk through. On the pro side, we have very high liquidity. It’s very easy to sell out of stocks.
Should you decide that’s the time most brokerages or markets have very low transaction fees. So from a barrier-to-entry perspective, it’s not very expensive to start investing in the stock market. It’s often frictionless to buy and sell anyone who has played around with online brokerages knows that you can be done at the click of a button. You can go buy and sell shares of stocks and diversification is considered quite easy with something called an ETF. And an ETF for anyone that’s not familiar is essentially a grouping of stocks or a grouping of companies that are all put together. And you can go buy a share of this ETF. And that automatically gets you exposure to a number of different companies as opposed to having to go buy one share of company a one share of company B one share of company C to get the diversification you’re looking for. ETFs have often done that for you. So if you’re interested in investing and diversification in the stock market, definitely go check out what ETFs are.
Now, some of the cons to investing in the stock market. It’s can be difficult to use leverage. We typically can’t get loans to go invest in the stock market. So if you want to go invest a hundred K you’ll likely need a hundred K in cash. Now, anyone listening that has a line of credit is likely thinking themselves, well, I can just use my line of credit and that’s not actual cash.
And you’d be absolutely right. But for all intents and purposes, if you don’t have a line of credit, if you want to go invest a hundred K, you need a hundred K in cash. There’s also some restrictions depending on where your line of credit is coming from and what you can and can’t do with it. For instance, I have a line of credit through my online stock brokerage, my online stock account.
It says specifically that I can’t use that line of credit to go invest in other stocks. So it is seen as a fairly risky investment. I think otherwise they would allow us to do it and they would make loans more easily at banks to go invest in the stock market. Another con is that it’s easy to make erratic decisions in times of economic turmoil.
So when the stock market crashed or crashes as it has on many instances, you hear about panic selling or mass sell offs. And so that’s difficult to come back from oftentimes. And so I have a good friend who’s a financial advisor and he said that part of his job is basically to act as a therapist to his clients when the stock market tanks because people are nervous when they see a lot of their value essentially evaporate and there’s not a whole lot they can do to get it back.
Again, not necessarily the case for everyone getting a little bit too in the weeds here. So moving on to the last con we’re going to get into in a minute here, how you as an owner can actually affect the price of your real estate versus here in the stock market, we don’t have the ability to defect change.
So important to be thinking about these things and cognizant of them. If you’re considering investing into the stock market.
Read More
