How Anyone Can Retire Early & Wealthy, Part 3: The Stock Market
If you've read Alex Long's last two articles in this series (Part 1 and Part 2), you know by now that making money rarely is risk free, and generally plays out to be a high risk-high gain/loss scenario. The best way to make money is to have money, so for this article, lets assume a financial backing of about $10,000 dollars. For the sake of simplicity, I'm going to be working with online trading systems in this article. Some stocks are traded on exchanges, where buyers meet sellers and decide on prices. Other exchanges are physical, carried out on a trading floor. I'm sure you've seen pictures (like from the movie Wall Street) where people are yelling and waving their arms, note-sized papers flying everywhere. Online stock trading is the best step for beginners, and is much simpler and easier to manage. Some people view the stock market as a game, but I assure you, the market is not always "fun". If you want to be successful, you need to view it as a business and take investments seriously.
The stock market is a huge, vast topic that would take thousands of words to fully explain. I'm simply elaborating on the basics in this tutorial, but I have included links at the bottom of the page for further reading.
There are two market types; the primary market and the secondary market. When you hear people talking about trading stocks and buying and selling shares, they are referring to the secondary market, which is most commonly generalized as the stock market itself. Primary markets are more physical exchanges, like the New York Stock Exchange, where investors and sellers are united physically, and matched by an individual called a specialist.
When a company goes public, they give investors and stock traders the opportunity to invest. The company will decide on what portion of shares to distribute, and what the cost of those shares will be. Say, for example, you owned a company worth a million dollars, and decided to go public at ten dollar a share. Your company would now be composed of a million shares, available to the public. Of course, as owner of the company, you would keep a certain amount of those shares, say 100,000. Your company is now worth 9 million dollars, but you are no longer owner of the company outright. You are working for the shareholders, who own 90 percent of the company.
If you're primarily looking for a low involvement, long term investment, dividends are your best bet. I'll be using this stock as an example. TDG is an oil drilling company that distributes a five cent dividend generally every three months. This means, for every share you own, you make five cents. Say you purchased 1500 shares of TDG (costing about $6.64 a share, your investment would be around $10,000), you would make 75 dollars every three months based on dividends. Though this doesn't seem like much, it does add up. There are other stocks that will pay higher dividends as well, such as STX (Seagate Technologies) and INTC (Intel Corp).
Another option is actually trading your stocks. Though it takes more involvement, you can make significant profit off minimal investment. Say you purchased 10,000 shares of this stock (currently at about $1 a share, that's an investment of $10,000 dollars). If the stock goes up five percent, you make 500 dollars. Stocks like these go up and down five percent regularly, so there is plenty of opportunity.
There is substantial risk when investing in the stock market. Dividends are subject to change with the fluctuations of the stock. Never ever invest more than you are willing to lose, and ensure that you don't focus your energy and investments on one stock, but a rainbow of variations. That way, if you lose money on one, you can make money from the other. Watch for "bottom" in a stock, the point where it plateaus slightly and steadies. That is generally a good time to invest, but again, never put in more than you are willing to lose. Stock trading is a great hobby, but should never be considered gambling, a game, or "just for fun". If you're looking for steady, reliable investments, the stock market is not something you should consider. However, with greater risk comes the potential of greater gain.