How to Understand Stock Markets

The financial life of an independent citizen will benefit from their understanding of how stock markets work.

While many see the subculture lit with a molotov cocktail, the glow of a stock ticker has a potential for power far greater than any explosion of fire. Money can make the world go round and support your independent, artistic life.

There is much misconception among the subculture about the roles and rites of Wall St. Many people whispers of Kabal Occults and evil demonic like beings. Hell, Reinhardt, a shadowy internet conspiracy theorist who correctly predicted the great crash of “08, thinks the game is rigged and has a warning for his paying customers on February 9th, 2010.

The reality is, while the elites will continue to bicker about the morals and inner workings of the markets, no one will stop the stock markets from existing any time soon. Even the great depression showed only a dip in the markets, but the vast economic downturn did little to kill the markets. Too many people profit from the system to ever stop it from existing entirely.

Therefore, even in the financially unstable near future, to gain an understanding of the inner workings of the stock markets will be one way to help insure your future.

Why only the other day I received a letter from a friend with the video “Will Draw For Food: Compare Your Life To Pixar” by Josh Mirman, of Punks and Nerds: Quaterlife. In the Video, Josh explains that people or organizations take 12 years to achieve success in the creative arts business. But many people give up their dream before they reach the 12 year mark.

How can you be sure to make the 12 year mark? In Live Your Means, Wesley gave you a couple of ways to look at your life and pear down your expenses. But the frugal life will never get you, or me, the Prada bag or special item from Fred Segal.

To achieve the fruits of material wealth, an understanding the stock markets is a good financial weapon to have in your arsenal. Dan Aykroyd and Eddy Murphy, in Trading Places, showed the world that stocks can mean big money. Martha Stewart showed us even housewives can get in on the game, and you know Ann Coulter, my personal hero, has a widely diversified portfolio (just a guess).

Stock Markets mean Money

Well before you ever place a penny in any basket, we need to understand the basics of the Market and the power of money.

What are Stocks?

Individually, stocks are shares in a company. Share meaning that you share ownership of a company with everyone else who holds stocks in that company. If you buy stock in Google, or GOOG on the NYSE ticker, then you share ownership with everyone else who owns stock in GOOG.

If you take the number of shares you own and divide it by the number of shares the company is split into, the product is the percent of the company that you own. For small traders this number is normally way below 1%, but if you are Bruce Wayne then your percent could be quite impressive.

Why Issue Stocks to the Market?

Why would a company considering giving away slices of their ownership? The answer is free money. If a company needs money to make a new product or take their business to the next level, they have two options. They can borrow money from a bank and pay the interest on the borrowed money. Or a company can split up it’s ownership and sell the pieces to investors.

The investors who buy shares, in effect, bet on the company to make more money with the help of their investment. If the company makes money, investors get a piece of the profit and the value of each share rises. If the company fails, the investors are out their investment. Hence the reward and risk of the Stock Market.

As an investor, your rule of thumb is to buy stocks at a low price and sell them at a high price. But where and who can you buy and sell stocks to?

What is the Stock Market?

If your local Grocery Market is the place to buy groceries, then by the same logic, the Stock Market is the place to buy stocks. There are many stock markets found around the world, where businesses sell shares of their company to awaiting purchasers.

At the Grocery Market, there are helpful clerks who will help you buy the groceries you are looking for. At the Stock Market, the helpful clerks are called Brokers, who will help you buy the stocks you are looking for.

Here in the U.S., The New York Stock Exchange, or NYSE, is a physical exchange. Meaning, stocks are physically traded on the floor of the NYSE by floor Brokers. Alternatively, The NASDAQ is an electronic exchange. Meaning that stocks are electronically traded through a network of computers.

Hypothetically, how does the Stock Market Work?

Let say you have done some research on Google. You might have read that “Google is in the midst of a power play with China”, but you also have read that “Google Docs is allowing any file to be uploaded.”

Both of these bits of news could effect Google’s price on the NYSE. If Google pulls out of China, the price of their stock may go down as they lose the Chinese market. If Google’s online file storage is a huge success with Google users, the time they spend on Google applications will rise and Google Ads will generate a larger income for the company. Larger income for the company means larger profit for the shareholder and higher value for each share.

As a keen investor, you wait to see what happens and in one future dimension, Google ceases all business in China. When this happens, some share holders are frightened by the bold move and agree to sell their shares for a little lower than they would before the China exile. The share price drops from 600 to 592, a 8 dollar drop.

Now as a keen investor, you know Google is a new age Blue Chip, or stock that is generally seen as solid long term investment. Everyone uses Google, and their domination of the internet remains unmatched. With their Online File clouds about to be expanded, you know they will make up the 8 dollar drop in their stock price.

You guess the price of Google Stock will rise and remember the rule of thumb “buy low, sell high”. GOOG appears the right stock for you and you contact your broker. You tell them how many shares of GOOG you want to buy. Your broker will then contact a floor broker on the NYSE who buys the stocks. The floor broker then takes your shares of GOOG and holds them for you until you want to sell them.

If you are right and Google File Cloud expansion is a huge success, the value of each stock will increase. If Google’s stock price returns to 600, then each stock would have gained 8 dollars in value.

This is an oversimplified example of how the exchange of stock works but it’s a start as we set out to understand how the Stock Market works. Join me, Jane, your ever faithful Corporate Sponsored Label Whore, next time in “How to Understand Stock Markets 2: Google Finance Boogaloo”