Whats The Purpose Of The Stock Market For Businesses, As Well As The Average Investor?

The purpose of the stock market is for both companies and investors to make money. Starting and running a company requires cash. there are many ways to get cash. One of them is becoming a publicly traded company and selling a percentage of your ownership. That’s the business side. And it’s a business side that several prominent social media companies have taken or are about to take: that’s you Facebook, and Twitter!

But for us, the average citizens, we don’t see that side. We buy and sell stocks hoping to make money. But, obviously that’s not always not the case. Ill talk about the business side first. Which is important for any investor to know, as well if you want raise money for your own business some day.

Going Public Provides You With Cash Virtually Overnight

If you own a company, the purpose of the stock market for you is selling stocks, which is a great way to raise funds quickly. A business owner can sell up to 49% of his company and still retain ownership. It is a great way to raise funds quickly, thus you can expand your business quickly.

You must weigh the pros and cons and speak with an underwriter before doing this. An underwriter is basically someone who helps you through the whole process and in the end writes you the check. They value your company, do the market research, and finally find you investors.

The Down Side To Becoming Publicly Traded

But, obviously there is a down side. But many businesses have decided that it’s worth it. As well as not retaining complete ownership, you must also open your books to the public. When a company goes public, it offers an Initial Public Offering, or an IPO. All this means is that this is their first offer to the public to buy part of their company. The underwriter works with the business owners to decide how many shares to sell and at what price.

At a later date the company can sell more or buy back some of they’re stock, thus increasing or decreasing they’re ownership in the company. When a company feels like they’re value is going to go up, it is wise for them to buy back shares. The public knows this, thus it increases the investors’ faith in the company and usually the remaining shares up.

Don’t get this confused with insider trading. You are not allowed to trade based on information that is classified or has not been released to the public yet. This rule applies to company owners, employees, or the general investor. So basically, everyone. I’m sure you wont come into this situation. But just in case you do, its better to not make that extra money, than wind up in jail.

Why Buy Stocks?

When you buy a share in a company, you literally own part of that company. A share can be over-valued or under-valued. You find this by with the price per sales ratio of the stock. You find this by multiplying the number of outstanding shares by the price per share. This gives you the market capitalization, or the market cap. You then take that number and divide it by the company’s revenues. You take that number and compare it other companies in the same industry. This is fundamental analysis. I don’t dabble in this. But it is good to know and a useful tool.

Stocks can also be over-bought or over-sold. That is determined with the RSI oscillator, which I use every time I research stocks. I am a technical investor. That means I look at the charts of a company’s stock.

Most newbie investors first hear about studying a company’s fundamentals. That is called fundamental analysis. The fundamentals are what a company must publish quarterly in order to retain their membership on a stock exchange. This was implemented with the securities and exchange act of 1934. If investing is the purpose of the stock market for you, be safe and good luck.

Be Ahead Of The Curb

If you are an investor, the purpose of the stock market for you should be to beat the hoards of investors to buy and sell before the general public catches on.

curbAs I said before, when you buy a stock you are literally buying part of that company. Stock value is determined by many things. One of them is what the average investor sees a stock as being worth. Thus, a stock price can be inflated or deflated, as I discussed previously. The average middle class person comes in hoards to buy a stock that looks exciting and looks like its going up. Real investors know that they can make money in an up market or a down market. Experienced investors also buy before the public catches on and sells short after the stock has become inflated and is on its way back down.

I’m not saying that you should send your money to a broker. Just Because they are professionals, doesn’t mean they are going to make you money. I’m not saying that stock brokers are your average uninformed investor. But since they trade conservatively, they usually go with the flow of what everyone else is doing. Brokers enjoy using heavily fundamental analysis. They would be good for you if you truly have no idea what your are doing and you are looking to invest in the long-run.

If you want to be a long-term investor, I do recommend fundamental analysis. But, if your looking to be an active trader, like myself, I recommend technical analysis.

So, investors making money is the second purpose of the stock market.

If You Don’t Succeed, Try Try Again

So, the purpose of the stock market basically boils down to businesses being able to get quick cash, with some sacrifices and us being able to make money by buying part of a company. Its good to know how and why stocks work. But don’t spend too much time researching this. Focus on your bottom line, which includes technical analysis and possibly fundamental analysis. The best way to learn in by making mistakes. So, do your research, get in, make mistakes, and repeat. Whatever the purpose of the stock market is for you, good luck.

So, Why Buy Stocks? For Today As Well As Tomorrow

Why buy stocks? This is an important question. One that I often hear and when you start trading you will hear as well. There are two main reasons. One, to make money. The other, is for the priceless knowledge that you tend to pick up automatically just from trading.

To Make Money, Of Course

moneyWhy buy stocks? Why of course to make money. Right. Yes, this is true. But there are many ways to make money. And if its only about the money for you, you may want to work with a full service broker. This may not be the important important reason, but without this factor, there would be no stock market.

Yes, you buy stocks to make money. You can make money in a down or an up market. When you buy a stock hoping it will go up, its called buying long. When you want a stock hoping it’ll go down, its called selling short.

You can also make money with stock options. All stock options are connected to a stock. When you buy an option, there is someone else on the other side selling it. This is not like a public company, when you buy stock outright. This is another investor involved. Anyone can sell an option. But, usually the person selling has to have the money already in the brokerage account, just in case the deal goes sour for him.

Before you tackle the selling of options, you should have some experience with buying options, as you can lose a lot of money this way. When you are betting on a stock option going up its called a "call" and when you bet on it going down, its called a "put".

Learn Today, Profit Tomorrow

Another answer to "why buy stocks?" is for the experience and education. For me, and for most other investors, its not all about the money that your making today. One of the reasons I’m trading today it for the priceless knowledge that I will receive. When I’m older and am playing with more money, I will still use most of the same things I know now to make larger profits.

The only difference will be that I will be trading larger sums of money. So its good to get started even if you only have a few hundred to work with.

Find Out What Makes A Business Really Tick

You also tend to catch onto the inner-workings of a business. You begin to understand how a balance sheet works and how money must be divided in order for a business to be successful. Also, when its good to go into debt and just how much debt is too much.

This is valuable knowledge that is important to learn. You may want to use this information some day in your own business. Also, of course the more familiar you get with this information, the easier it will be for you to spot a good, solid company.

Now Your Armed With The Answer

So, the next time someone asks you "why buy stocks?", you can let them know your reason. I am passionate about stock investing. The stock market is real. You can dig deep into a company to see what you are getting yourself into. You can watch the news and find new investment ideas. The stock market is connected to most everything around us. That’s my reason.

Two Main But Very Different Places Where To Buy Stocks

There are a few different places where to buy stocks. You must buy your stocks and other securities through a registered broker who works for a registered brokerage house. Stock trading is really easy. Making money with stock trading is not.

While stock trading is the main focus of this site, know that you dont have to limit yourself to simply stocks. You can also buy such things as options, ETFs and currencies. If this sounds good to you, you may want to check out the other markets.

But, for now, back to what we’re all here for, stock trading.

I hope by the end of this you understand the difference between a full service broker and an online discount broker. Those are the two places where to buy stocks. I use a online discount broker, Scottrade. I use them because I prefer to do all the research myself. But if you are someone who isn’t familiar with which stocks to buy, you may want to opt for a…

Full Service Broker

The place where to buy stocks if you would rather trust your money with a professional is with a full service broker. They are the most costly of the two, with a fee based on the amount of stock you buy instead of a fixed fee. They will give you advice and talk with you on a one-on-one basis. Online discount brokers don’t offer this.Hundred dollar bills

My grandma uses a full service broker. I often talk to her about technical analysis and choosing stocks since I am more of a hands-on guy. I like to know exactly when and why I’m buying a stock. I do it for the knowledge. I don’t mind losing a few hundred bucks, as long as I learn from my mistakes, which I usually do.

She is happy for me but prefers to trust her money to the professionals, like many Americans who prefer not to be bothered with all the work. Full service brokers generally focus on long-term gains, and diversifying your portfolio. They employ a whole department focused on research to find the best stocks for you and to monitor your current investment. Where to buy stocks would be a full service broker if you are like my grandma and feel safer dealing with a professional.

Online Discount Brokers

Another place where to buy stocks is from an online discount broker. Scottrade has a minimum opening account balance of $500. This is one of the reasons why I chose Scottrade. Soon, I may be changing over to another online discount broker that doesn’t charge as much. But, Price is not the only important thing for me. With Scottrade, you get the benefits of a larger company, with still the low trading price. Scottrade also has many offices around the country.

The lowest charging brokerage as far as I can tell, charges only 2.50 per trade. But, since I will be only doing between two to five trades per month, I might stick with the same broker.

The small minimum opening balance is a big seller for Scottrade. they also provide other benefits such as $0 account closing fee, and 444 branches nationwide, which are more offices than the other leading brokers.

This is a big difference from the not so well known online discount brokers, which many have only a few or no offices.

Now You Know The Difference

So, if your going to get a full service broker, good luck. I’m not familiar which one is the best. But, they do compete often with one another. So, try to find a good deal with the top players.

For me, I prefer an online discount broker and to do all the research myself. If your in the same boat, I look forward to teaching and hearing back from you as I continue to write this site, as this site is focused around technical analysis.