Stock beginner guide – Why buy stock

Part 1

Most people know the existence of stock market and know that they could make money from the stock market. When we talk about making money, many are interested. However, before you plunge into buying stock, have you ask yourself “why buy stock”? In general, buying stock should be part of your financial plan, and you should not treat it as a form of gamble.

Let’s start with the very basic concept - personal financial plan. As a start, you will need to have a stable job and prudent spending habit. Preferably, every month you should have some residual money left after all the bills. First, keep a few months of living expense as rainy days fund. Second, engage insurance agent or financial planner to get sufficient insurance coverage. This is to prevent any unfortunate event that could derail your financial plan.

After that is done, the next stage is wealth accumulation. In simple word, how to grow your money. Some would say I only have few thousand dollars and it is impossible for me to get rich. That means you haven’t hear about the magic of compounding.

For example, let’s say you have 1000 dollars and a bank is willing to give you 10% interest. How much is your money after 20 years?

1000 x 1.1^20 = 6727.5

A thousand dollars actually grow to over six thousand dollars after 20 years. That’s the magic of compounding which your interest would also earn interest. Given 20,000 of saving and investment return of 20% a year for 20 years. You would get

20,000 x 1.2^20 = 766,752

This sound a bit tempting. To grow the money, many turn to stock market.

What is stock? In simple term, stock is a share of business. When you buy a stock, you are not just buying a piece of paper but a share of a business. Behind every stock is a company and behind a company is a business. Business is out to make money and grow. When business grow, that means you earn return.

Typically, company makes money and the yearly earning could be channel back to the company for future growth. Your investment return could come in the form of share price appreciation or yearly dividend. Depends on how well the company is doing, the company share price would react accordingly.

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