Understanding Investing: The Stock Market

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1.     Stock, Share or Equity What Are These?

These all different expressions of saying that you own a piece of a company. When you invest in a company via the stock market you own a share of that company. When the business revenues go up over time that share price will become worth more as the company’s value increases. That value is also known as your equity in the company so when somebody asks how much equity you own they are talking about actual stock ownership in terms of investing.

2.     What are Dividends and Capital Gains?

Some companies issue dividend payments if you own a share of their company. A dividend is a fancy word for a company’s distribution of revenues back to their stockholders. Essentially dividends are a thank you for investing in their company. Capital gains is essentially, fancy verbiage, meaning the difference from when you initially bought the share to when you sold it resulting in money gained.

3.     Where do the shares come from?

They come from what is called an IPO, Initial Public Offering. When a privately owned company decides to become public they will issue an IPO in order to sell shares of the company. Companies do this as a way to create funding to invest into new projects and continued growth of the company. Once they issue an IPO they are officially listed on the stock market through a stock exchange.

4.     What is a Stock Exchange?

A stock exchange is where companies are listed and their stocks are bought and sold. The different exchanges include the NASDAQ (National Association of Securities Dealers Automated Quotations) and NYSE (New York Stock Exchange) are the two biggest ones in America.  All of the companies listed on all the exchanges make up the stock market.

5.     What are Stock Indices?

There are there major indices that investors follow as a way to judge the overall growth of the market over time. These three include the Dow Jones Industrial Average (DJIA), the Standard and Poor’s 500 (S&P 500) and the NASDAQ (same as previously stated) and they all compose of different companies

  • DJIA composes of a weighted price average of the 30 largest blue chip companies listed on the NYSE.  Blue Chip Companies are some of the largest corporations in America with a solid reputation, dependable and earnings and usually pay a nice dividend to the shareholder.
  •  S&P 500 composes of a weighted price average of 500 large cap companies that are the leaders in their industry.
  • NASDAQ Index composes of 5,000 market cap weighted companies that are listed on the NASDAQ Exchange. Market cap weighted average means that the companies with the most market value (number of shares times price of share) have a greater influence on the index price chang

The financial world is full of acronyms and words that can easily confuse new investors. Don’t be intimidated by the financial jargon. Stocks are easy to understand if you take a step back and remember that the stock market is a business market where you can become an owner.  Just make sure to do your homework and understand the business before you invest.

Read more: 4 Reasons You Should Have a Financial Plan in Your 20s & 30s

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Steven LaFleur attended college at the University of Nebraska-Lincoln where he majored in finance. After college, he worked in his family’s business. After three years Steven decided it was time to pursue his passion; helping and educating younger generations on money, planning, and finances. Steven is now a financial advisor at True Measure Wealth Management in Omaha, NE. Steven and his wife Kelly have two daughters who keep them busy at all times of the day. Steven enjoys skiing in the mountains and also biking and golfing during the non-snowy months. As a junior advisor, he’s passionate about helping the younger generations plan for their future. For more of Steven’s insights subscribe below.