How the Stock Market Works - Essay Example

A stock can be termed as a partial ownership of a company. The partial ownerships are called shares that are offered to the public through the initial public offering for the first time. The stocks can then be sold and bought by the public at any time after the initial public offering. A person who owns as little as one share of a company is said to be a shareholder and has partial ownership of that particular company. Stocks are bought with the hope that they will appreciate thus the shareholder makes a profit.

This is what has made the stock market to be very popular. When a company is doing well, the value of its stock appreciates and when it is not doing well, the value of its stock decreases (Farang 6). The stock market is one of the most profitable ventures in the world. Investors can buy shares of the companies of interest at a low price and sell them at a high price thus making profits. To do this successfully, the investor has to understand the company they are interested in completely.

The issues of the company affect the value of the stock directly. As such, the investor is required to keep following up on the happenings of the company to know the best time to purchase stocks of that company. Timing on the time to purchase the stock is important (Kettell 33). The value of the stock can appreciate over time; the little profits earned at any given time can be compounded over the months and years leading to higher profits. Those interested in stocks should invest in the quest to compound whatever they earn over the years.

That is the best method of investing in stocks. Compounding interest from stocks for one or more decades can generate a lot of profits, especially for well-performing companies. Looking at Apple Inc as an example, the value of its shares has increased by over four hundred percent in the last 18 years. An investor, who purchased Apple stocks worth one thousand dollars in 1995, has over four thousand worth currently (Pundit 1). Some people have been able to make the percent of their capital or more per year.

They get their capital back in at most ten years at that rate. What they earn after that are just profits. Some stocks have appreciated even faster getting the capital back faster (Schabacker 42). Another reason that creates a lot of interest in stocks is diversification. An investor can purchase many stocks of different companies thereby spreading the risk. They are guaranteed profits almost every month. When the stocks of some companies are performing poorly, others are performing well.