Amazing Kids! Magazine

Understanding Stocks

By Victoria Feng, Money Smarts Editor

 

You may have heard of people growing their fortunes when they invest in stock. When you invest in stock, you are also investing in a company. If you hold stock in company XYZ, for example, you own some of everything they have. In my entrepreneurship article which I posted in May, I said it was important for entrepreneurs to find sponsors, or investors. Holding stock basically means you’re one of the company’s investors. However, since most people only hold a little bit of stock, it means that they don’t get to make important executive decisions or anything. However, for every stock you own, you may get a chance to vote when electing the board of directors. The main reason stocks have gained so much popularity is because you can invest in different types of stocks depending on the type of risk you want to take. You can invest in new companies that are risky and perhaps make a great deal of money quickly, or lose it all. You can also invest in stable stocks that provide a stable return on your investment such as utilities or stable stocks like Coca Cola or IBM. Some people invest in the stock of companies they use so they feel a part of the company, such as Disney or some Levis. As I will later explain in this article, if something can gain you a lot of money very fast, it could also let you lose money very fast.

You may have seen stock charts like the one below, with slopes with positive and negative changes. Stock prices change for a number of reasons, a combination of reasons, or for no reason at all. Possible factors include the impact on profits when a company has a big and important announcement. If the news is good, then stock prices may rise, because investors think the news may improve the profitability or future prospects of the company. Likewise, bad news can send stockholders scrambling to sell their stocks. As a lot of investors move to buy stocks, the price may increase as competition for those shares increases. As a flood of investors go to sell a stock, it can drive the stock lower in price as there may not be many buyers and they need to lower the price to get new investors to buy it. Another important factor is how much money a company will make. If a company’s prospects for making money increase, the stock price will rise because investors get to share in the future money that is made. Likewise, if business is slowing and future income will be lower, this will be reflected in a lower stock price.

Some very important stock terms are bulls, bears, chickens, and pigs. And no, this is not a joke or a typo. Bull markets are when the economy’s doing well, and people are earning money and finding jobs. Naturally, the prices of stocks are rising. However, it probably won’t last forever. When you realize a bull market is coming to an end, stocks may begin to fall too. That leads us to a bear market. If you haven’t guessed already, a bear market is when stocks are falling, the economy is getting worse, people are losing jobs, etc. It’s harder to pick profitable stocks, but you could wait until you see a rise in stocks and buy them. Investors can also be called bulls and bears. Bulls are people who believe that stocks are going to rise, while bears are those who believe that stocks are going to fall. Calling someone a chicken means that they are afraid to do something, right? In “stock language” a chicken is someone who is afraid to take risks. This type of investor just invests in safe stocks. While they won’t lose much, chickens most likely won’t make any big money either. Pigs are the exact opposite. They are rash and don’t think before they leap. Pigs invest in high-risk stocks without truly understanding them, which will cause their demise and them to lose a lot of money.

Before computers and other electronics existed, people had already begun trading stocks. Instead of simply clicking ‘sell’, traders had to go to the brokerage and hand in their stock certificates. Now companies like Scottrade make the process easy. On the Scottrade website, it says that “with a click of a mouse” you can complete a transaction. However, they are not free and in Scottrade’s case, cost $7 or more for each transaction. The company also notes that anyone who would like to trade using traditional methods (like what I described with the stock certificates) may use that too.

In the first paragraph, I said that if something can make you rich, it can also make you lose a lot of money. One major stock crash occurred in the 1930’s. Since then there have been controls put in place by the government to prevent some of the problems that made the economy collapse during that time. However, there will be economic downturns and upturns that will effect various industries and their future profits. These trends can effect stock prices. Rather than big stock market swings however, the main things that investors need to be concerned with are the activities of the company they invest in. Major events can effect stock prices such as approval of patents, settlement of lawsuits, or changes in senior management. These dramatic changes, which will affect future earnings, can make you lose or gain money quickly.

There are plenty of resources out there if you want to learn more about stocks. Keep in mind these main points:

  • Owning a bit of stock does not imply that you can make executive decisions or have freebies of the company’s products
  • There is no magic formula or one-size-fits-all-companies approach to the stock market
  • Bulls and bears can be used to describe the market and investors- chickens and pigs are also used to describe investors
  • You can easily trade on trading websites.

Good luck learning more about the stock market!

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