How Investment Works

Any time you are going to be putting your money into a
fund; it is a good idea to start by understanding what you
are buying into. The stock market is a complicated entity,
and doing minimal business in trading requires a fair amount
of basic knowledge, as well as the understanding and
acceptance of the high risk factor. The more you know in
advance regarding the functionality of the system, the less
likely it is that you will take a heavy hit, ending in
devastating loss.
First of all and probably most important in the trading
business, you should understand what stocks actually are.
When you buy or sell a stock on the open market, you
should keep in mind that you are dealing with real objects,
not pieces of paper; you are buying and selling real parts of
a particular company, its product, or some other various
commodity.
Owning a “share” means that you have actually bought into
the company or product involved and become a partial
owner of that commodity. Of course, you could be one of
millions of shareholders, as most companies and products
are broken into minute pieces of the whole, but you are still
considered an investor in that company or product until you
sell your shares.

Think of it as paying for a tank of gas in the car that your
parents bought for you to drive. You may have even bought
the oil filter that has been put on the car, and you may feel
that this investment makes you part owner. However, when
you look at the overall cost of the car, you have really
contributed very little to that amount. However, as long as
you continue to invest in the gas for the car and take care of
the maintenance needs, you can claim part ownership of the
car.
Because the value of a company and its products or services
can fluctuate continuously, the value of the stocks you hold
will not be the same from day to day and can sometimes
even change hourly. When the price per share drops and is
considered low, it is an ideal time to purchase. This is the
least expensive way to begin your trading venture, and
working with a stock broker will allow you to gain more
information as to what stocks are ripe for the purchase at
any given time.
In doing so, you become a stockholder, and the value of
your holdings will fluctuate from day to day. Your gamble
(and hope!) is that the value of the company or product in
which you have invested will increase or rebound from the
low price at which you made your purchase. This is the goal
of all traders and means that your stock will become more
valuable.

As the value of your securities increases, so does your net
worth. When the price of the stock in your possession
reaches a high point, it is time to sell, making a profit on
your original investment. Ideally, you will always sell your
holdings for a reasonably higher price than the purchase
amount and should never sell when the current value of the
stock is below your initial purchase price. It is important to
make sure that you do not purposely take a net loss because
there are plenty of occasions when you could be forced to
take a loss.
For example, if you purchase shares of a company at twenty
dollars each, you should never sell them for eighteen dollars
apiece. If possible, you want to hold off until they are each
worth perhaps forty dollars, in essence doubling your
money. Of course, this is just an example, and not all
stocks will ever double in value, but the illustration is
meaningful.
There are other, more complex ways to invest in the stock
market. However, much like learning to ride a bicycle, you
do not want to make your first attempt without training
wheels.