In all the years that I've been helping clients to reduce taxes, invest wisely, and retire comfortably, I rarely find that people really understand what stocks are, and what the stock market is.
Why?
It's because nobody ever taught you!
Luckily, you stumbled across this article, and you're about to get a simple, clear, plain-English education about the stock market. Ready? Let's go!
What is a stock?
Simply put, a share of stock is a piece of ownership in a business. If you go online today and buy 1 share of XYZ Company stock, you are a part-owner of XYZ company.. Pretty cool, right?
But that's just the tip of the iceberg.
What do all of those numbers mean?
What is a stock/share price?
When you look up a stock's share price, you're getting an approximate quote of the "value" of that share of stock. If you check your favorite app and it says that XYZ company is $295. What does that actually mean?
If you wanted to buy 1 share of XYZ Company today, you'd have to pay around $295. If you wanted to sell 1 share of XYZ Company today, you'd get around $295.
Why do stocks go up?
The basic premise of why people invest in stocks (especially growth stocks, which we'll cover in another article) is because they expect that stock (i.e. that business) to be worth more money in the future.
You have to remember that while there are a million different theories about why stocks "go up" - it's generally a pretty simple supply vs. demand explanation.
There are only so many shares of a company available for the public to buy (that's why a stock is called "public" or "publicly-traded"). Typically, there are tens or hundreds of millions of shares available. Sometimes more, sometimes less.
If XYZ Company reports that their new product was a huge success and they've made a lot of money, there's a decent chance that more people will want to buy their stock, and less people will want to sell.
What happens when lots of people want to buy something but there aren't a lot of people willing to sell? The price usually goes up.
There are a million other reasons a stock could increase in value (hype, new CEO, new invention, changes in laws, etc.) but it generally boils down to demand.
Why do stocks go down?
Amazingly, stocks go down for the same reason that they go up. Demand.
If XYZ Company reports that year-over year sales went way down, that's probably going to scare investors and they'll want to sell their stock. But, everyone else knows that sales were down, so who wants to buy it? Price generally goes down.
The good news is that unless things are really, really, really bad, most large-cap (meaning huge) companies don't go to $0. It's always possible, but there is usually someone willing to buy at some price.
Again, a million other reasons for a stock to go down. Anyone remember 2007-2009?
Stocks went down out of fear. Fear that our entire financial system was on the brink of collapse (Narrator: they system actually was on the brink of collapse). There was also a completely insane bubble in the real estate world. People were getting mortgages that they very clearly couldn't afford.
Another recent example was in the beginning of 2020, and since many of you reading this are in the healthcare industry, you'll certainly remember what happened at the beginning of 2020.
Complete and total panic. The stock market absolutely tanked in a matter of weeks. A few companies did well, but there was definitely blood in the streets. Nobody knew what COVID was and there was legitimate fear that we had a major pandemic on our hands (Narrator: we did. It was deadly for many, and life-altering for just about everyone).
That all makes sense, but what should I invest in?
Ahh, the million-dollar question. What should you invest in?
You're bombarded almost every day with a pitch as to why you should buy this or sell that. Your crazy uncle tells you that you should just keep all your money under your mattress. Some salesperson comes along and tells you that you should invest your entire account into an annuity. A guy on TikTok tells you that you should just buy real estate for passive income.
Who's right? Who's wrong?
This is where working with a fiduciary financial professional can make a huge difference in your life.
What is a fiduciary anyway? It means that your advisor has to act in your best interest, and they'll likely have to prove that to a compliance officer and/or a regulator such as FINRA or the SEC.
You want someone to act in your best interest, right?
A good financial professional will help you to assess your current situation, your goals, and help you to develop a roadmap of how to get there.
"XYZ stock, it's going to the moon!" isn't the kind of financial advice we give. We give advice tailored to healthcare professionals that want to minimize taxes, invest wisely, and retire comfortably.
Next Steps:
Next up in the Investing 101 series - we'll talk about the differences between buying individual stocks as compared to buying mutual funds, ETFs and index funds.
If you'd like to learn more about the process we use to help potential clients make an education decision about our firm (or any other firm they're using/considering), just click below to see how we help our clients at Speer Street Financial.
Speer Street "Get to Know You" Process