What is the Stock Market?
Let's pretend company X is looking for capital to grow their business.
They offer a percentage of their business for sale in exchange for the needed capital. It could also be for other reasons like free publicity, or to dissolve a large family owned business, but for the most part it is to raise capital.
Business X is worth $1,000,000 and is looking to grow a new division of their company in hopes to profit another $300,000 annually. The capital raised would go towards building a new manufacturing facility on the West Coast.
They will be offering 40% of their business for sale in the form of shares.
They will be dividing the 40% into $ 400,000 shares.
Each share will be for sale for $1.
Once the shares are sold at the market, the company has the capitol needed to build its new facility. Each person that buys shares owns a small portion of the company. The company has it's $400,000 and wether the price of each stock goes up or down, it does not effect them. You are simply trading stocks with other people in the same way you would if you imagine a swap meet.
HOW DO YOU MAKE MONEY?
Short term gains can happen because demand for the company is so high, that other buyers in the market are willing to pay $1.03 for the stock that you bought at $1
If you offered your stock for sale at $1.03 , you would have gained a quick 3% on your money.
Why not do this all the time?
Because you might be the buyer, buying at the $1.03 price, and it falls back to $1, and you LOSE money.
So how do we know when to buy, and sell? – WE DON’T!!!
The only way to win is to invest for an extended period of time (5-10 years), with money we don’t need, so our emotions are not involved.
Mutual Funds are the perfect instrument for investing over an extended period of time.