The stock market: what is it and why should you invest?
The stock market can appear daunting, with its percentages, graphs, and financial figures. Movies like "Wolf of Wall Street" have further painted it as a place where people manipulate other people’s money with no cares for how it helps or hurts their clients. Contrary to popular belief, the Stock Market isn’t even a physical place, and you don’t need a broker to invest in it.
To help you better understand the stock market, let's use an analogy. Imagine it as a bake sale stand. Say you need ingredients for baking more Cookies and Cakes. You approach your friends and propose splitting your $60 bake sale stand into six parts. If they invest $10, they can have 1/6th of the company. As the business grows, so does the value of their investment. Eventually, that initial $10 stake might increase to $50, allowing them to sell their share to someone else for a profit when they choose to cash out.
The process of dividing a business into shares and making them available for public purchase is what we call “going public.” This step, similar to what was portrayed when Steve Madden gave his speech in Stratton Oakmont in "Wolf of Wall Street," is often favored by large businesses over seeking bank loans. By selling shares, companies can avoid hefty interest payments associated with loans. Furthermore, the more shares a company sells, the more money they will have to put toward expansion.
Consider Twitter going public in 2013. Struggling to fund necessary projects for growth, they initiated their Initial Public Offering (IPO) and raised $1.8 billion just by selling shares. Compare this situation with taking out a loan of the same amount with a 10% interest rate over a decade. The overall amount they would have to pay back would be over $2.8 million. With stocks, companies only pay shareholders dividends or buy back shares when opting for private ownership, like Elon Musk did when taking Tesla private in 2022.
You might wonder: Why invest in stocks instead of just putting money in a savings account? The simplest answer is inflation. Everyone has heard their parents talk about how they used to be able to buy a soda and some candy for 25 cents. This is because prices fluctuate over time due to economic changes. The American dollar has been steadily decreasing in value since our parents were kids which is why the amounts we have to pay for goods and services now are so much higher.
The more you invest though, the more of a return you can get from the market. Stocks fluctuate based on all kinds of things all the time. Monitoring the decisions and announcements made by companies you've invested in is so important for knowing when to sell stocks. This is where we find a need for Stock Brokers. These are professionals who track the market and make strategic moves with your investments to ensure the maximum amount of return on your money. While there are avenues to invest without a broker, some of the most successful individuals in the world opt for using a Broker rather than taking the time to watch their investments themselves.
