Rule No.1: Never lose money.

A quick and efficient way of making money is through investment in stocks, provided you understand the business. The stock market is a crucial financial institution, which fulfills the need of capital that businesses are looking for, while letting investors profit as shareholders in companies, creating a win-win platform for both, investors and businesses. However, making money on the stock market is another ball-game altogether. Trading stocks requires a substantial amount of study and understanding, before you put your hard-earned money on the line and begin making profits. The following article attempts to give an insight into the working of the stock market and what stock investing for dummies entails.

Stock Market Essentials

When asked what the stock market will do, J.P. Morgan replied: It will fluctuate .

The word stock is synonymous with the stock markets, trading, brokering and the often confusing terminology that accompanies it. One is often at a loss to explain the meaning of certain financial terms, necessary for any successful attempt at taming the stock market. For investors new to the stock market, knowing what these financial terms imply, can be the fine line between success and failure.

An entrepreneur finds an unexploited niche of the economy, an area where there is latent demand and can be fulfilled by launching certain products. To go about this, he needs to establish a company which will produce, market and sell this product. However, before he realizes his dream of becoming the next Rockefeller, he must answer a very basic question- Does he have the money to do these things? The answer, in most cases, will be in the negative. How then does one go about raising money, or more formally, raising capital? The easiest, safest and quickest way to do this is to offer the public a stake in his enterprise, a small portion of holding for which they shall pay a particular sum. This holding is known as stock. the unit of which is a share. One may hold stocks in IBM, but buy a hundred shares of Exxon. The entrepreneur now has sufficient money to buy equipment, rent space, hire workers, run an assembly line and market his revolutionary product. The shareholders — the people who purchased stock in his company — have limited exposure to risk, only to the extent of their holdings, if the venture suddenly folds.

A company goes public or becomes a joint-stock company, when it sells a part of its equity holding to raise capital, through an IPO (Initial Public Offering). The stocks are sold at a fixed value in this initial sale, after which they can be traded on the secondary market, which is the stock market. The price of shares depends upon several things, the company’s profitability being one of the prime factors. If our entrepreneur can make decent profits from the word go, the price of his stock shall increase as people compete to purchase the same number of shares, however, if he runs into losses, the price will go down. Stocks can be of the following types:

• Preferred Stock: Preference stockholders are granted privileges over and above that of common stockholders. They are distributed dividend before the common stockholders, and also hold a higher claim when it comes to asset distribution, in event of the liquidation of the company.
• Common Stock: This is the equity that a company offers its stockholders as ownership. The common stockholders have voting rights and are invited to the annual general meetings of the corporation. They can vote for selection of management and receive dividends from the payouts of the company’s profits.