The stock market can be a good option for new investors looking to spend their finances wisely. If you are new to this type of business, it can be comparable to legalized gambling so be very careful before you dip your money. Understandably, there is a possibility that you win or lose depending on the situation of the market. In fact, lots of people got rich in this kind of industry but lots more lost when the recession hit Wall Street.
However, it is very important to note that investing money in stocks must involve careful understanding of the advantages and disadvantages before moving into the bandwagon. Consequently, it can be used as an investment vehicle for monetary gains, but you should also know how to manage your money to avoid devastating losses in the end.
It can be a little scary to think that you can lose money upon investing in stocks. But perhaps learning a few terms about stock investments will take away your fears.
- Share of Stock – a share in a company’s ownership. When you purchase a share, a portion of the earnings and assets of that company will be entitled to you.
- Assets – the overall property of the company.
- Earnings – the company’s income as a result from its sale of products and services.
Now, perhaps you will ask why a company would desire to share its earnings and assets in the stock market. The fact that it requires money to cover the startup costs or expansion plans, it has two ways to do so.
- Debt Financing – also known as the borrowing of money
- Equity Financing – also known as the selling of stocks
One disadvantage in borrowing money is the addition of interest to the actual amount owed. However, stock selling will enable the company to get the money but with little strings attached. No interest and requirement to pay the money back. As it distributes the risk to the pool of investors also known as stockholders, it will not lose all the money when the investment fails. Smaller portions of that stock owned by other people will be lost instead. So when investing on stocks, it is conceivably wise to select the company with good reputation or good financial standing to avoid losing all your investments.