As a young investor, you can learn a lot about the stock market when you buy stock in a company.
When a company wants to raise money, it will sell shares of stock, or pieces of ownership to the public. Let’s say for example that XYZ Company wants to expand nationwide. In order to raise money to do that, it sells shares or ownership. If XYZ has 100 shares and you buy one of them, you own 1% of the company.
Unless you’ve been living in a cave for the last 12 months, you’ve probably heard (and noticed) that the economy isn’t in the best shape. Maybe the current economic conditions have peaked your interest and you’ve started paying a little more attention to the morning paper or the evening news.
If so, you’ve probably heard the stock market referred to as an animal…either a bull or a bear. A little strange, I agree. But what do they mean?
Yesterday, we talked about the differences between a Traditional IRA and a Roth IRA, but then you may also have the option of a 401(k).
But what exactly is a 401(k) and how is it different or better than an IRA?
Like an IRA, a 401(k) is a retirement savings account. The difference is that a 401(k) must be offered from your employer, while you can set up an IRA on your own. Just like a Traditional IRA, you do NOT pay taxes on money you put into your 401(k) but you are taxed on the withdrawals you make when you retire.
Both types of IRAs (Individual Retirement Account) are pretty similar in how they work, but there is a significant difference when it comes to taxes.
The Traditional IRA and the Roth IRA are the same in that they are available to anyone. The only requirement is that you have an earned income that you paid taxes on. There are no other age restrictions or financial requirements. Once you put money into an IRA, you can’t touch it until age 59 1/2, otherwise you’ll be paying penalties and taxes if you take it out. Those are the similarities, but here’s where they differ…
With all the negative news about the economy and how supposedly the world is coming to an end, it’s no wonder everyone is looking for a safe place to invest their money. But even shoving your cash in a coffee can, putting it under your mattress, or burying it in the backyard may not be the safest options!
Before you invest your money, here are two questions to answer?
Let’s break each of these down…
So we’ve established what stock is and how a stock exchange works, but who determines the prices of the stocks themselves? Let’s go back to our original example with your clothing store in the mall that’s for sale, I Sell Clothes.
I really thought you would come up with something more creative!
You have 20 shareholders (aka owners) who each own 5% of your clothing store with individual shares worth $10,000 each. You with me? One of the owners decides he’s not interested in owning his share anymore and lists it on the stock exchange for sale.
He originally bought his share for $10,000 but what is it worth right now as he tries to sell it?
Yesterday, we looked at the main piece of the stock market: stock. Today, we’ll look closer at the stock market itself. I’m sure you’re familiar with what a market is, but just in case, it’s basically a place where people come together to buy and sell goods. So a stock market is…put the two pieces together!
Let’s start of by going back to our illustration from yesterday. If you remember, you are in the process of selling your clothing business at the mall called I Sell Clothes.
Did any of your customers ever tell you that’s a strange name? Hey, it’s your store!
Instead of getting one person to buy your store for $200,000, there were 20 different people who each bought a share of ownership for $10,000. But what happens if a few months into it, one of these 20 owners decides he doesn’t want to own part of your store anymore. He wants to sell his ownership share. What are his options?
I’m sure you’ve heard or seen people on the news talking about how “the stock market was down 2% today” or how “trading was at an all-time high today,” but you’ve never really known what that stuff means. Hopefully we can clear that up for you!
(NOTE: As we walk through this, there will be several terms we will cover that you may need to look up in our glossary to make sure we’re on the same page.)
Let’s start by examining the main component of the stock market: stock. Stock is basically giving someone part ownership in a company. Here’s an example…