So, you are starting to think about getting into the stock market. You have seen all the hype and friends are constantly talking about their Robinhood accounts.
But you really do not know where to start or what it means to own stock in a company. Well, let us start here with a simple explanation of the stock market basics.
What does it mean when you buy a stock? In this case a “Piece of the Pie”
The stock market explained as easy as pie
Everyone loves a good piece of pie… it can be the same for owning a good piece of a company.
The stock market is where stocks are bought, sold and traded.
It is the same as if you were to buy a regular product from a market except in this case the product is the company itself.
What you buy is a stock or a share of ownership in a company.
For the purpose of this explanation, we are going to use a whole pie as the company and each slice of the pie is a share.
The pie has been cut into 10 equal parts and if you buy one slice of pie.. then congratulations you are now the proud owner of 10% of the pie.
I have a piece of the pie now what?
Ok great now I have this delicious piece of pie, now what? Well, that piece of pie has value. And the value of that piece of pie is determined by how many other people want that piece of pie.
The greater the demand for that pie the more value it will have. If 20 people want to have pie and there are 10 pieces than the overall value of the pie will go up… on the other hand if only 5 people want pie and there are 10 pieces than the value goes down.
Of course, it is not that simple because there are other factors that can influence the want or the value of the pie. Such things as news and announcements. For instance, big news comes out that the people now want cake more than pie or maybe pie has announced that they are expanding their flavors. All this can influence the value of that pie.
You did not buy that piece of pie to just eat you bought it to make money. Well in the simplest form you hold that piece of pie and let that piece grow as the whole pie grows in value. Then you sell that piece of pie when there is more demand for a profit.
Ok now you want to actually buy a piece of pie, but how?
First you would want to research the different pies that are out there and available to the public. You want to understand how that pie was made, all its ingredients, how it was put together and who the bakers are that are taking care of the pie.
Once you find the pie you want you need to find someone who can sell you that piece of pie. These are stockbrokers and can come in a few forms. But there are two main types of brokerages, there is a discount brokerage, these are more self-directed but can have lower fees. The other is a full-service brokerage which provides investing resources but at a higher cost.
Once you purchase your piece of pie, wait until it is cooked just right and is nice and hot… but take your time and keep a close eye on your pie you do not want it overcooked.