Chapter 1:
Introduction to the Stock Market
If you surveyed the general public, you would find that most people have a
vague sense of what the stock market is, but few truly understand it. In this
book, our goal is to present the ins and outs of the stock market and
investing so that you have a rigorous understanding of the markets and how
they work. At the same time, we’re going to present everything at the level
of a beginner. We’ll use simple language as much as possible while
familiarizing you with the lingo. No math background is required, even
though high-level math lies behind many of the tools used by traders. All
you need is some basic knowledge and a dose of some common sense.
Before I go on, I want to congratulate you. By downloading this book, you
have demonstrated that you aren’t someone who acts on a whim. You are
willing to learn and prepare before throwing all of your money at
something. And that is very important. While the stock market offers
unlimited opportunities and can help you to build substantial wealth, it's not
gambling, nor is it a game or a guarantee. There are real risks, and
protecting yourself against the risks is the smart strategy. That is done first
by having knowledge.
To get started, we’re going to familiarize ourselves with what the stock
market actually is and where it came from. We’re also going to discuss
some of the different ways that people handle investing, from mutual funds
to day trading. In this chapter, we will only provide a quick introduction to
each investing style; we will use later chapters to explore them in detail.
Finally, we’ll examine some “what if” scenarios and success stories. No
matter which path you choose, I wish you happy investing!
Why Does Wall Street Exist in the First Place?
The answer is painstakingly obvious, but few people on the street could
answer this question. Wall Street exists for the same reason that banks exist.
Some people have money, or capital, while others have ideas and
companies, but they lack the capital they need to build them out and earn a
profit. Markets are simply a meeting place to bring all these people together
so they can make a mutually beneficial exchange. Markets started out small
and direct, with people meeting face to face. Times have changed, and now
markets have grown into the modern versions we see today, large and often
completely automated with computer-directed trades. But at the lowest
levels, the fundamentals are the same as they were hundreds of years ago as
are the reasons the markets exist.
In a capitalist society, many people earn more money than they need to
satisfy their basic wants. And its human nature to want more of what you
have, and those of us who are forward thinking like to plan for the future
when we may not be able to work because of old age or disability. So, in
order to grow their own capital and invest in the future people with the
money available to do so are interested in investing it in order to see a
return. That return can be long-term to build their wealth and secure their
future, or it could be short-term to earn a profit.
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