What is the stock market?
The stock market is really like any other market where people buy and sell various wares. The only difference here is that instead of selling groceries, toiletries, and the likes, what is being offered for sale is the shares of companies. A single share is the smallest unit of ownership in a company and many companies list millions and billions of shares for sale on the stock market.
Once you own the shares of a company, you become a part-owner of the business and you begin to partake in any benefit that other owners get. Some of these benefits include Dividends if and when they are declared. You even get to attend the annual general meeting alongside other shareholders and vote on the important resolutions at the meeting.
Now that you understand what the stock market is, the next step is to choose the company you want to buy. You can only buy public companies. Just like no one can try to buy your sneakers except you display them for sale on the Facebook Marketplace or another eCommerce store, you cannot buy the share of Private companies.
There is nothing to worry about though, there are thousands of publicly traded companies available to choose from on various stock markets. For example, the New York Stock Exchange has about Two thousand eight hundred companies. You can always find a list of these companies using the link in the description below.
Once you have decided on a company, you then visit the Investor relations section of the company’s website to read the financials statement. The relevant information will include the Managements Discussion about the business, income statement, and the balance sheet. You can also visit websites like Yahoo Finance to check the summarized financial information of the company. This will help you determine whether the company is offering good value for your money.
How to read the company’s financial statement?
If you are bothered about how to read the company’s financial statement, I promise you there is an easier way. We will discuss that now. An Index fund is a portfolio (or group) of preselected shares. To put it simply, an Index fund is a list of stocks.
So, one of the more popular Indexes is the S&P 500. It is created by Standards and Poor. And it is a list of 500 top companies mostly in the United States ranked by Market capitalization. It is the collective performance in the share price of these companies when it goes up or down that forms the Index. Many companies including Vanguard and Schwab create their own Exchange-traded funds to mimic the performance of the S&P 500.
Although the approach that each company takes to achieve this objective is different, so it is should be worth your while to check the strategy of an Index fund before you invest in it.
For example, the VANGUARD 500 INDEX FUND allocates about 27% of its holdings to the information technology sector and about 13% to companies in the health care sector. So by just investing in these simple index funds, you already own a share of Apple, Microsoft, Amazon, and the likes.
One advantage of investing in an index fund is that your investment is diversified, and you don’t have to worry if one company goes under. This is a real advantage because big companies have gone burst in the past. In addition, you also do not have to read the financial report of different individual companies in order to start investing.
You can start simply by looking at the prospectus of an Index Fund and determine whether you agree with the general investment thesis. All the information you need can be found in the prospectus of the Index funds which are often easier to digest than traditional financial statements.
Risk factors of stock Market
There is a general risk when investing in the stock market, and it is possible to lose money when the stock market is on a downward decline. If the share price of the fund is down and you need to withdraw some money, you may be forced to sell at a loss.
Also, when investing in Index funds, there is a risk associated with the Investment style of your index fund. For example, the VANGUARD 500 INDEX FUND which we mentioned earlier invests nearly 86% of its funds in Large companies with high market capitalization.
The returns generated by the companies may sometimes fall short of any return that can be generated by investing in a single stock. I will now go through how to get started. There are now a lot of brokers that offer innovative applications that enable you to access the US stock market. Please note that investing using any of these brokers comes with its associated risk especially in Nigeria when you consider the inconsistent regulatory climate in Nigeria.
The Central Bank or Securities and Exchange Commission may block the accounts of these organizations as they have demonstrated with the crackdown on cryptocurrencies. This may mean that you are unable to access your funds for a short period of time if the government decides to freeze their accounts. Please satisfy yourself that you understand the risks involved and are willing to accept them before you proceed.