If you are tired of hearing people bragging about their share portfolios and haven’t a clue what they are talking about, then this article will help you gain an understanding of what stocks and shares are and how the markets work. Taking a payday loan, or any kind of loan to invest in high risk activities is a bad idea and in this article we are going to explain why.
In this article about understanding stocks, shares and loans we will look at:
- How many people choose to invest in stocks and shares
- What exactly are stocks and shares?
- What the owner gains from a share?
- What the stock market is
- Why the stock market rises and falls and what influences this?
- How to buy shares
- Why borrowing to invest is a bad idea
- Different types of loans
Everyone seems to be investing in stocks and shares
Many years ago, the stock market was something to be enjoyed only by the wealthy few, who were able to buy and sell shares in the financial markets. Today, the average person can purchase shares in world wide companies and sometimes enjoy healthy profits. If it seems that you are surrounded by people who are investing their money in the stock market and you do not know what they are talking about, then this article will explain, in a simple manner, what it is all about.
The stock market was something to be enjoyed only by the wealthy few, who were able to buy and sell shares in the financial markets.
You may decide, once you understand more about the markets, that you would also like to invest and consider borrowing money to do so. The stock market can make millionaires overnight, or reduce billionaires to paupers. Taking a loan to purchase stocks and shares or to spend on any high risk activity is something that we shall be looking at in this article. Let’s start by taking a look at what the stock market is.
What are stocks and shares?
In general terms, the word stock refers to the total value of a company including its profits, assets and its good name. This stock is divided into shares that may be purchased by investors. What you are essentially buying is a share of the company’s stock and, depending on how much money that you have to invest, you can buy as many of these as you wish. These shares may be purchased when the company originally puts them up for sale, or from other people who already hold shares and wish to sell them on.
What do I get for my share?
Each share is essentially a small piece of the company and as an owner of the company you should receive a share of the company’s profits. You will also gain the right to vote on who runs the board. As opposed to borrowing money from a bank, a company sells shares in order to raise money. Shareholders receive a share of the profits in return for their cash investment. This payment from the company is called a dividend. The members of the board will decide if the company is financially sound enough to pay the dividend and exactly how much the payment will be.
What is the stock market?
In Britain, the main stock market is the London Stock Exchange. Public Limited Companies, government bonds and other financial derivatives are bought and sold here on a daily basis. The market is divided into three different indices (groups), which consist of the FTSE 100, the FTSE 250, the FTSE Fledgling and the alternative investment market (AIM) which consists of small companies, many of which are venture capital backed. The largest 100 companies are grouped together and commonly known as the FTSE 100.
Why does the stock market go up and down?
When people refer to the stock market as rising or falling they are referring to the FTSE 100 index performance as a whole. The performance of the index shows of how well these top 100 companies are doing and indicates the well being of the UK economy. Companies may issue shares when ever they choose in order to raise capital and this is called share dilution. On first thought, it may look like a bad thing for the people who already hold shares in the company, but it often signals good times to come.
What can influence rises and falls in the financial markets
The prices of shares are continuously changing. A recent example of how share prices can be affected by daily happenings is reflected in the dramatic drop in oil prices. People predicted that established oil companies such as BP and shell would not perform so well in the near future and that the value of their stock would suffer. They rushed to sell their shares and the prices dropped accordingly.
Here are some other factors that can affect share prices:
- A country or a region’s political stability
- Weather conditions
- People’s fear in the economy regarding banks and large companies
- Government investment
How do I trade or buy shares
There are two different ways invest in the stock market, either directly or indirectly. The public are not allowed inside the stock exchange and the buying and selling is always done by a third party broker. The meaning of direct investment is when you buy shares in a single company and become a shareholder. Indirect investments are when an investment company pools money from many different people and invests in a lot of companies on your behalf. Most first time investors choose the later method of investing as it pools the risks between the performance of many companies as opposed to a single one.
Will I lose my money?
No one can predict if you will win or lose money with your investment. History shows us that shares that are held for long periods of time tend to hold their value and can pay more money than you would have got if you had kept your cash in the bank. Unless you were extremely lucky, buying and selling shares by trying to predict the markets usually ends in failure. There are too many factors that can affect the prices of stock and shares and in many cases make them worthless.
So what have we learned so far?
- The stock market used to only be available to the rich
- Anyone nowadays can invest money in the stock markets
- A share is a part of a company that can be bought
- You gain the right to vote for who runs the company
- Shares pay a dividend which is a share of the company’s profits
- The prices of these shares may rise or fall depending on many factors
- You can buy shares in a single company or invest in a group fund in many different ones
- There are no guarantees that you will make money on shares
Only invest money that you can afford to lose
Speculating on the stock markets is another form of gambling. There are no guarantees that you will gain money, even the wisest investors have been known to get wiped out by catastrophic losses. Any investment in the stock markets should be with money that is not borrowed and you can afford to lose.
Before investing any money you should make sure that you have at least six months living expenses put aside.
Before investing any money you should make sure that you have at least six months living expenses put aside. The short term performance of any stocks that you may have bought is very difficult to predict and it would be a shame to have to sell at a loss in order to cover living expenses that you didn’t have, due to unforeseen circumstances.
Why borrowing to invest in the stock market is a bad idea
If you decided to invest 1000 pounds of your own money in Amazon shares and the stock rose by 25% you would have made a profit of 250 pounds. If you had decided to borrow another 1000 pounds to invest then you would have made a profit of 500 pounds.
On the other hand, if you invested your 1000 and another borrowed 1000 pounds and the stock price fell by 25% then you would have lost 500 pounds. This means that instead of losing 250 pound you ended up losing half of your capital. If the shares continued to fail and you lost all of your capital then a stockbroker can demand that you credit your account to cover any losses that may be incurred.
This has happened to many people and the result was that they lost their homes and in some cases their families through being greedy. Investments should only be made with money that you can afford to lose. Many people who invest borrowed money cannot stand the stresses when a stock starts to lose money. Short term performance can be extremely unpredictable and some long term investments are cut short when people cannot stand the stress of short term losses and panic sell.
Borrowed money should be used wisely
People have borrowed money for centuries. Lending money has been part of our lives since the dawn of time, so to speak. Loans benefit both the lender and the person borrowing. Both parties can arrange the length of time and the rate of interest that will be charged on the loan and the borrower gets to have money that he could not have otherwise had.
There are times in life when you cannot get along without borrowing money. Such incidents are, for example, to buy a house, a car or to get an education. People may want to borrow money in order to experience something unforgettable, like a round the world trip or a dream wedding.
There are many different types of loans
Although there are many different loans on the market they fall into two categories, secured and unsecured. A secured loan is when the loan is secured against some form of collateral. When purchasing a home this could be the property itself, or a car loan could have the car as collateral. An unsecured loan is when there is no collateral to secure the repayment. These types of loans carry a higher risk to the lender and have higher interest rates.
Here are some of the most popular loans available:
| Mortgages | Secured loans that people use to buy properties |
| Personal loans | Secured or unsecured depending on what it was being used for. They can be used to consolidate other, smaller loans that people have |
| Car loans | Secured loans used to purchase a car |
| Overdrafts | Unsecured amounts of credit that are used in conjunction with a bank account |
| Credit cards | Unsecured amounts of credit. Once the payments are made you can spend again up to the pre fixed agreed sum |
| Bad credit loans | Secured or unsecured. They are for people who do not have a good credit rating. Types of these loans are payday loans and guarantor loans |
There are many good reasons to borrow money
As we have discussed, there are so many reasons that people need to borrow money at some point in their life to help them get along. Life is full of surprises and most people find themselves in need of a little financial help now and then. When money is being borrowed, it is important to be able to pay it back otherwise it can be very easy to fall into debt. Borrowing money, in the form of a payday loan or a bank loan in order to gamble or take on risky investments on the stock exchange, is never a good idea and can end very badly.