There's something else that you need to know about money as time passes money will lose its value because of something we call inflation in 1913 a gallon of milk cost around 36 cents in 2013 the price rose to and fifty three cents nearly ten times as much most countries aim for an inflation rate between two to two point five percent annually this number is how much value the money you have stored up loses every year meaning that saving all your money in a bank account actually becomes a problem over time and that's when you're presented with this term investing the idea of using your money to make more money to beat this rate of inflation you've probably heard about this stock market thing and how it's one of the easiest ways to invest your money but what even is the stock market how do you even begin investing it and is it truly as lucrative as other people want you to believe the market's open again after the worst week since the financial crisis the funds the hedge funds jumping 200 points at the open this morning it's just a good place to put your savings you suddenly put them together and you say damn it that's what's happening a market is simply a place in which things are bought and sold if you live in a country like the united kingdom the united states or india your economy is very much fueled on a wide array of markets for example a fruit market deals with the buying and selling of fruits.
A real estate market deals with the buying and selling of houses and the stock market deals with the buying and selling of stocks which begs the question what exactly are stocks a stock or a share both terms are used interchangeably to essentially mean the same thing represents a par ownership in a company if company x had a total of 10 shares sometimes commonly referred to as the outstanding shares and the founder of this company owns all 10 shares they own 100 of the company if the founder owns five shares then they own only 50 of the company and so on now we often refer to those who own shares in a company as a shareholder.
but this begs a new question why would a business owner or a founder decide to sell shares in their own company imagine for a moment that you owned your own company a bakery things have been going well you own the best baked goods in the area and sometimes customers are queuing beyond the door but you're aiming big see you truly believe that your bakery company and the goods that you produce are the next best thing in the industry and so you want to expand your business you want to open up more chains hire more employees run bigger marketing campaigns but to do that you're gonna need to raise more capital or money for your company now you could go to the bank and ask to borrow money but that means paying interest on that loan they might even deem you too risky and refuse to accept your offer.
So another option to raise capital for your business is by issuing or selling shares in your company you can either do this privately and sell those shares to some good friends who believe in your business or you can do this publicly and have those shares sold to anyone that wants to buy this would be done through a special event which is known as an ipo an initial public offering whereby your private company becomes a public company and so after another successful day at the bakery you decide to do it you decide to ipo in frenzy on wall street today for the initial public offering of twitter board pricing its ipo at 19 each electric car makers surged nearly 41 the second best ipo game of the year tremendous interest in this ipo this morning uber has priced its ipo at 45 per share part of going public as a company is deciding on how many shares of your company you would like to actually issue and the number of shares you issue to the public is commonly referred to as the float now the initial value of each share in your company is determined by how well your company is doing financially.
How similar businesses are doing and how much demand there will be for your shares when they do go public along with many other factors public companies will then have their shares listed on what is called a stock exchange to explain this let's use fruit markets as an analogy in your city there may be numerous amounts of fruit markets but you will have the choice of only one of these fruit markets to set up your fruit stall now instead of fruit markets imagine they're called stock exchanges they're the actual place at which the trading occurs and instead of fruit stores there are a bunch of companies listed at these stock exchanges it's up to you to pick the most appropriate exchange to list your company's shares and each stock exchange will have their own specific requirements in order for companies to have their shares listed and traded there some of the biggest exchanges in america are the new york stock exchange founded in 1817.
The nasdaq founded in 1971 most notable for having some of the biggest tech companies listed there such as google apple amazon and intel but stock exchanges exist around the world not just america now let's introduce stock brokers into the mix a stock broker purchases and sells stocks on behalf of an investor they act as a middleman in the past brokers would go to what is called a trading floor at a stock exchange shouting over one another trying to fulfill their clients requests but thanks to the power of technology this process has become more and more automated and is done using computer algorithms this actually reduced the need for a physical location for a stock exchange the nasdaq for example has no trading flaws at all so how does a trade actually happen an investor will first go to a broker and make an order for a share just like you'd make an order for amazon this order however will include a few extra details in order to help your broker first you must actually specify the company in which you'd like to buy or sell shares in this is often represented through what is called a ticker symbol which is just an abbreviated name to represent a company.
Apple's ticker symbol is aapl amazon is amzn tesla is tsla to name a few you can find out what a company's ticker symbol is through a quick google search next is the side which is do you want to buy or sell shares then you have the type of order you see it helps to see the stock market as an auction market there are thousands of buyers bidding for how much they want to buy a share for and thousands of people selling asking for a certain price when a buyer and seller match the trade commences this happens millions of times a day as the price of a share fluctuates based on the supply and demand for those shares one order type is a market order which essentially tells your broker to buy or sell that share at whatever price is available on the market another order type is a limit order which like an auction sets a reserve price for the shares you want to sell or a highest bid for the shares you want to buy meaning you won't sell for anything less than your reserve price.
And you won't buy for anything more expensive than your highest bid of course the risk here being that if the stock never hits the price you're aiming for then the order will never be filled now there are other order types that exist but a market order and a limit order are generally considered the big two after providing your order type you then let your broker know the quantity of the shares you'd like to buy and that's it in the past this would have been done through written mail buying and selling actual physical stock certificates then once the telephone came along you could place an order with your broker over the phone now however most brokerages are online or have apps where you can place an order without actually having to speak to somebody and the shares have moved from becoming physical certificates to electronic records much to the delight of any introverted investor so the question now is how do you the one who is watching this video use all of this knowledge to make the right investment decision but before we go on if you're gonna be browsing online for stocks.
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Or you who are making investments for their own personal account institutional investors however refers to the big players in the game pension funds mutual funds hedge funds banks and so on that invest large sums of money on behalf of their clients these institutions will often have analysts who meticulously study the market and determine the best investment decisions to make this video is however focused for people like me and you retail investors the goal is to make money and to do this we want to buy a stock and at some point sell it for a higher price profiting the difference you'll commonly hear the phrase buy low sell high that is essentially what we're aiming for but to do that we're going to have to have an idea of what stocks are going to rise in price and what stocks are going to fall in price but how could you possibly know that well the price of a share is very much fueled by the supply and demand for that share.
If tomorrow apple releases some great news about an upcoming product we'll expect demand in apple shares to increase as confidence in the company grows and people expect apple to be more profitable with the release of this upcoming product because of this sellers want to be paid more for their shares and buyers are willing to pay higher for those shares the price of apple stock therefore increases but this means there is a lot of unpredictability in the stock market all sorts of things can impact the price of a share a change in ceo the quality of the products a new government policy or even how fashionable a given business sector is it's difficult for the average retail investor working a job or running a business to have to keep up with this every day and this is why investing in the long term is generally considered better for the average retail investor than investing in the short term long term investing is buying shares and holding onto those shares for potentially years down the line billionaire investor warren.
Buffett is well known for applying the strategy of value investing where he looks over a company's fundamentals the assets they own their liabilities the actual book value of the company and invests in companies that he feels are undervalued this has obviously worked out incredibly well for him short-term investing however usually means holding on to shares for sometimes even less than a day before you sell them for most retail traders however this is just too risky too easy to lose money and not worth the time stress and energy required to consistently be making a return on your investments most of us want to be able to make investments that are passive in other words they don't involve a lot of time and energy required in order to be maintaining them ideally we want to be able to set it and leave it and for some people even the idea of doing research into a company seems like more effort than we'd like enter indexes indexes measure the performance of certain stocks and tend to tell us something about the stock market overall for example you might have already heard of the dow jones industrial average sometimes shortened to the dow jones or just the dow this is an index that tracks the stock performance of the top 30 companies listed on the stock exchange in the united states our fears that the dow will drop and drop quickly up more than 1000 points the dow sharply higher above 30 000 as you talked about perhaps you might have heard of the standard and pause 500 more commonly known as the s p 500 this index tracks the stock performance of the top 500 companies listed on the us stock exchange in the uk we have the ftse 100 which tracks the top 100 uk companies listed on the exchange the purpose of these indexes alone is to help us see how the stock market is doing overall.
But what if you were able to invest into a fund that contained all of these companies inside of it this is where index funds and what we call etfs which stand for exchange traded funds come into play both of which are very much the same with only slight differences for example the vanguard s p 500 etf contains all of the companies inside the s p 500 index but allows you to invest in it just like you would a normal stock in other words you can go to your broker and make the purchase of one share in the vanguard s p 500 etf meaning that you are essentially splitting up your money into the 500 companies that the s p 500 index tracks this single fund acts as a way of diversifying your investments without actually having to go out of your way to invest and manage shares in 500 different companies instead an etf like the vanguard s p 500 does this for you it looks as though you're invested in just one stock but in fact it's a basket of other stocks best of all when a new company enters the s p 500 index it is automatically included in the s p 500 etf without you needing to do anything you'll often hear many personal finance.
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