Clown-Free Investing: A Beginner’s Guide to Navigating the Stock Market

Stock Market 101 Stay away from clowns
Stock Market 101 Stay away from clowns

Stock market: many places in just one

The Stock Market can represent different things for different people. It’s a casino for those who seek for easy money. A scam for those who don’t believe in the financial system. A party for newcomers. An intangible place for the least wealthy. The Stock Market is a big circus for anyone who doesn’t know what is doing. But guess what? In this circus, you don’t have to be the clown.

What is the Stock Market?

It’s easy to understand the Stock Market and how it works. The name says for itself. A stock (or share) represents the smallest part of which the company’s capital is divided. But it can’t be any company. You can’t buy the smallest part of that coffee shop you like so much if the company isn’t publicly traded. To do that, you’d have to talk with its owner and settle a partnership outside the Stock Market.

In addition to that, isn’t easy for the owner of this coffee shop to join the Stock Market so you (and everyone else) will be able to buy its stocks. Something like this requires a lot of due diligence and money that many companies don’t have (and they don’t need to). It’s not easy to convince the market that it’s worth investing in your coffees. Some companies will try to sell the coffee as gold, but the market doesn’t accept things like this. At least not always.

Why companies join the Stock Market?

The answer to this question is straight: because it’s tougher to grow alone. The Stock Market represents an essential component of any country’s economy and the most important symbol of financial democracy.

When a company joins the Stock Market and goes public, then it’s saying to the investors that its owners have decided to fractionalize the company’s capital into many pieces called stocks. This is known as IPO (Initial Public Offering). Before an IPO is completed, the company must fulfill several regulations and specific rules from SEC (Security and Exchange Commission).

If the IPO is successfully completed, then the company will raise a certain amount of money and the stocks will now be publicly traded by all kind of investors. Its price will fluctuate over time and the company is now obliged to publish several financial statements every quarter. This will serve as input for the investment decision making process.

If the company succeeds in the market, then we already know what is going to happen…

Figure 1 – AAPL stocks – 1999 – 2022

If the company doesn’t succeed, we already know what it’s going to happen either…

Here is the magic. Remember your little “piece” of the company’s capital called stock? You can have 1 billion, 1 million or just 1 stock. It doesn’t matter. The democracy comes from the fact that you have the opportunity to hold a fraction of the capital of any kind of company around the world.

If the company sells Uranium and earns a profit, a fraction of it’s yours. If the company sells furniture, energy, stuffed bears, smartphones, or just dreams, a fraction is yours. But, if the company fails, your responsibility is limited to the price you’ve paid on its stock. If you take wise steps, you can earn much more than you’ve paid.

There is no economy without companies. No jobs, no money, no goods. The companies keep the wheel running and for that they need money. Not only from you but also from the banks. And that is what the stock market represents: a catalyst of economic development.

A stock has no price, but a disagreement

When you go to a supermarket to buy some goods, the price is there. If you want to buy a pack of rice, the price is there. Usually, you can’t discuss the price once you get to the cashiers.

The Stock Market isn’t like this. There is a line for every stock filtered by the best bids. The system will filter the sellers starting from the lowest price offered and the buyers starting at the highest bidders.  When an equality is reached from both sides, then there is a deal and the last price is shown on the screen.

A stock has no price. The screen price only shows the price of the last bid. There is no guarantee that the next seller will be willing to sell its stocks for the same price. This price can only change due to a disagreement. If the price changed, so we can conclude that a buyer decided to buy at the same time another person, a seller, disagreed with him and decided to sell.

Take the following numbers as an example. Even though the last price was $14, the lowest price that the seller is willing to sell the stocks now is $15. If the buyer doesn’t increase $1 or the seller doesn’t decrease $1, the last price of $14 will never move. This is why we need disagreements to match.

You can’t go alone

Please, do not call Apple to order stock. Don’t look for it on iTunes or Apple Store. You can’t just access your bank account and look for AAPL. You need to be registered with a Broker Dealer approved by SEC. You will need documents (real ones) and you will need to comply with IRS (Internal Revenue Services). Otherwise you will be in trouble. You can find more information about registered broker-dealers here.

Be aware. If that company with a strange name and a beautiful website doesn’t appear as registered where it was supposed to be, run to the hills and stay away.

Why YOU should join the Stock Market?

The answer is easy: to make money! The Stock Market is the most important mechanism in an economy since it connects all kind of investors, from $1 to $1 billion, with the greatest (and not so greatest) companies in the world.

You have the opportunity to be a partner in everything. Do you have $1000 and want to invest in technology? Fine! Do you have $100 and want to invest in emerging markets through ETF? Fine! Do you have $10 and want to invest in disruptive technology and robotics? that’s fine too. Do you like space exploration, uranium, energy, and flying cars? You can do it too.

The Stock Market is like a mother’s heart. It always has room for one more. This is cute, isn’t?

Many investors succeeded in the Stock Market using a lot of patience and research. One of them was Warren Buffet. He uses a simple strategy that takes a lot of time. Some time someone asked him something like this: “If your strategy is so simple and effective, why no one follows?”. He answered: “Because no one wants to get rich slowly.”

If you read the book “Excess Returns” by Frederik Vanhaverbeke, then you’ll realize that he was right. Take a look at the approximate excess returns of some of the biggest investors ever.

We are talking about an annualized EXCESS return over S&P 500 index. This means that these guys have not only beaten the most important stock market index over time, but they managed to deliver an EXCESS return over it.

We are not talking about that lucky shot of 100x in a week or 1000x in a month. We are talking about consistent gains over years and years to come.

It’s time to end this short article not with my words, but with the words of two investors on the “Excess returns” list. Let’s hear Joel Greenblat and Jim Rogers.

We can conclude that people are still crazy and when the bear market comes (it’s here already) people will lose everything they made because they don’t know why they made it. And this is all true.

If you have time and patience. If you heave eager to learn and if you believe that good companies at good prices are a way to go, then the Stock Market is for you and it will be like a mother’s heart.

But, if you are making money without knowing why. If you are buying companies because your friend told you so. If you are playing a sum-zero game, then the Stock Market is also for you. Not as a mother’s heart though, but as a circus. Be cautious not to be the clown.