facebookHi I know this is a really basic question, but I’m just starting out and want to learn about investments. So, what exactly are stocks and how do people make money by trading on the stock market? TIA.? - Seedly

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Anonymous

11 Feb 2021

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Hi I know this is a really basic question, but I’m just starting out and want to learn about investments. So, what exactly are stocks and how do people make money by trading on the stock market? TIA.?

Discussion (5)

What are your thoughts?

Rachelle Lye

Rachelle Lye

07 Sep 2020

Level 14·Digital Marketing at Fintech

Hey Anon!

I just wanna say that I think it’s really brave and laudable that you’re taking the first step on your personal finance journey by asking! 😊

That’s what the Seedly Community is for, a safe space to ask all your questions and to help each other grow together on our personal finance journey! 🌱

I myself am still learning, so here’s my very simplified take! Any gurus out there feel free to correct me and help all us newbies along the way…

1. What are stocks?

Stocks are a type of investment that gives you part ownership in a corporation and entitles you to a part of that corporation's earnings and assets.

To give a very simplified example, if Company A has a total of 1000 stocks in the stock market, and you have 100 stocks in Company A, you own 10% of Company A.

If you’ve come across other terms like “equities”, “shares” and “securities”, don’t worry they can be used interchangeably with “stocks”. (Thank goodness phew)

So when you purchase stocks belonging to Company A, you become a shareholder of a company A as well. Makes sense?

There are two main types of stocks:

  1. Common stocks - gives shareholders voting rights, but no guarantee of dividend* payments.

  2. Preferred stocks - does not provide voting rights, but usually guarantees a dividend* payment.

*A dividend is a distribution of profits by a corporation to its shareholders. When a corporation earns a profit or surplus, it is able to pay a proportion of the profit as a dividend to shareholders.

2. What is the stock market?

Stock markets are where individual and institutional investors come together to buy and sell shares in a public venue.

Imagine the supermarket, but instead of food, everyone is selling stocks (pieces of their business).

In Singapore, there is only one place where these exchanges can take place, Singapore Exchange (SGX). In larger countries like the US they have more than ten stock exchanges, but the popular ones are the New York Stock Exchange (NYSE) and NASDAQ.

Companies listed on the stock exchange are able to float** shares to the general public in an initial public offering (IPO) to raise capital. This means that anyone in the general public (like you and me) are able to buy their stocks!

**Float refers to the number of shares actually available for trading.

3. How do people make money by trading on the stock market?

Just like any other business, buying at a lower cost and selling at a higher price!

Source: Google

Let’s use a recent example, if you bought SEA Group stocks six months ago at $45.91 (9 Mar 2020) and sold them now at $144.15 (4 Sep 2020), you’d have made a ~3x profit.

But of course, to decide when is the right time to buy often requires a lot of analysis and expertise (if not we’d all be Warren Buffetts right now 🤣 )

Hope this helps!

🙋‍♀️🙋‍♂️ And to everyone reading, please do leave an answer / answer comment to let us know if this is the type of content you want to continue seeing on the Seedly Community!

We are all at different stages of our personal finance journey, so do let us know if this type of content is able to help you! Also, feel free to continue asking any follow up queries here!

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Hey there anon!

I am also a budding investor so I totally get where you're coming from but no question is too basic. Let's learn together!

To answer your first question, if you own a company's stock, it essentially means you own a part of the company. Thus, when looking out for stocks to buy, we must not only look at the financials but also the core business model of the company and also the type of company it is i.e. what kind of business are you buying - tech (Google, Apple, Microsoft), commodities (palm oil), retail (shopping malls).

To answer your second question, I must disclaim (again) that I have also only recently started on my investing journey so my explanation may not be the best. I think when I look at stocks, I see 2 types - growth stocks and dividend stocks.

1. Growth Stocks

Growth stocks is for trading so it's the one where you hear phrases like "buy low, sell high" and the turnover of the stocks can be in matter of days. It is also usually short-term. People make money by making profit out of the selling their stocks above the price that they paid for. It is generally viewed as a riskier option than dividend stocks.

2. Dividend Stocks

Dividend stocks, on the other hand, is to hold for long term and as the name suggests, pays you dividends. Dividends can simply be viewed as a form of 'reward' for putting your faith, money and time (since you will be holding 10 - 20 years or forever) in the company. People make money by earning the dividends, then reinvesting back to take advantage of this magical thing called the compound interest!​​​

View 1 replies

Just attend a basics of investing webinar online (there are many resources online) and you can start...

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