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These Basics Will Make You Big Money in the Markets



So right now, I'm going to begin at the beginning – and show you how to make money in the markets from square one.

Today is all about stocks.

In future columns, I'm going to talk about bonds. After that I'll get into options, futures, and other derivatives (they're easy).

And finally I'll show you how they all – stocks, bonds, options, futures, and derivatives – come together every day.


You'll know more than your friends – even more than most brokers. And you'll start "seeing" the money in the markets.

So, let's get started.


Investing from Square One

Stocks, traditionally, are "shares" in a corporation. The words "stocks" and "shares" can be used interchangeably. These days you can buy shares or stock in other business structures like limited partnerships and limited liability companies, as well as other entity structures.

But the concept is the same; you're buying shares. For our purposes we're going to be talking about shares and stocks of corporations.

When you buy a share of stock, you are literally buying a share in the equity of that company.

Companies raise money by selling ownership interests to investors and the public. Equity is the business term for an ownership interest. Ownership interests take the form of shares of stock in the company. That's why the words "stocks" and "shares" and "equities" are all interchangeable.

Now let me show you how it all works – using Facebook Inc. (Nasdaq: FB) as an example.

Before Facebook went public in its IPO (initial public offering), it had raised money privately by selling ownership interests in their business to venture capitalists and other institutional investors.

Institutional investors can be public companies or private companies, and their business is to invest large sums of money. Mutual funds are institutional investors, and so are hedge funds and private equity companies and trust departments at banks and venture capital companies.

As Facebook was getting bigger, Mark Zuckerberg, his original partners, and the investors who had given the company money in return for their equity interest in Facebook, wanted to raise more money to expand the business and to "monetize" their investments or create an "exit" for themselves.

Because interest in Facebook was enormous, the company attracted a lot of "inside" investors who put up money to own a piece of the company. Eventually Facebook attracted 500 investors who gave it money in return for equity shares.

Understanding When You Can Buy

There are rules about how many investors a non-public company can have.

A company can "go public" when it wants to sell more ownership interests or shares to more investors after it has reached the 500-investor limit.

That's what Facebook did. The company decided it would offer shares to public investors like you and me and institutional investors.

Now, when a company hits the 500-investor limit, it doesn't mean they have to go public. It can stay private and raise more money from the 500 investors it already has.

Join the conversation. Click here to jump to comments…

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  1. lina | April 29, 2014

    hi there. my name is lina and to tell you the truth i'm a newbie in the trading world and i would like to learn as much as i can abt penny stock. i know it probably doesn't mean anything to you as the topic that i read from your article will based on big fish i guess.but it will help me alot. i'd really appreciate if you could teach me about penny stock, how do i know when i'm supposed to sell the shares (i think they called it as lock gains and stop loss or stop exit if i'm not mistaken) and how do i know which one should i choose to get. i read the books, books that my friend had recommended, i checked on yahoo finances, see the charts, see the today's most gainers, signed for the newletters for the tip of the shares for which one would be profitable, but i dont think what i'm doing is right. i know this might be wasting your time but i'd really really appreciate if you could help me abt this issue. i really dont know who else i should asked for help. i hope you could help me about it and thank you for your time. i appreciate it. thank you and hope to hear from you soon: )

  2. Tariq | April 29, 2014

    I am a non US citizen, living in middle east, what is required to be able to trade on US stocks and companies.

  3. Dan Neri | April 29, 2014

    How did they decide what to price a share of Facebook when it went public?

    Thanks Shah

  4. Celeste Ferenczi | April 29, 2014

    Thank you, Shah, for taking the time to write these articles on the "basics". I appreciate it very much! I did learn a few things. I, also, really enjoy your articles "What everyone needs to know about money". They are very informative. I did try to sign up for your "Short-Side Fortunes", but I was told that since my experience level was at #1, I wouldn't be eligible. Is there a way around that? From your article on basics, how are the "Shares outstanding" determined? What exactly is "peak earnings season"? When you sign up with a brokerage firm, and their trade fee is 9.95, is that per share purchased, or for the total number of shares purchased? Is that amount considered commission, or is commission a seperate amount? I've elected to receive my pension early.(while it's still there) I was thinking about investing it in an IRA. What is the best type? Are there any other things I should be aware of? (ex. I did find out that you have to fund an IRA with cash) Celeste

    • 000058049731 | May 15, 2014

      I never knew that Short Side Fortunes required one to be an experienced investor.
      How' that. I appreciate that it is a rather risky investment procedure possibly requiring substantial amounts of money, but what else is required?

  5. Peter Flander | April 30, 2014

    Dear Shah.

    What happens when outstanding shares continue floating ? How long can they do so and are any possibilities for making money created by that, type options ?

    Regards Peter Flander

  6. steven wilson | April 30, 2014

    I am non US citizen, living in England what is required to trade U.S stocks.

  7. Don Setzco | April 30, 2014

    Please tell me who gets to vote the shares company owns/holds if anyone.

  8. Larry Allbritton | May 1, 2014

    Is it true that companies with good financials and pays dividends that are raised every year will see you through Bear markets?

  9. steve | May 2, 2014

    What information do you consider essential to look at to decide whether a stock is going to move or not?

  10. rick | May 3, 2014

    I am nearing retirement and was wondering if i draw social security will
    i still be able to invest in the market….i really hope so

  11. Milton | July 7, 2014

    Was going through back articles and saw this one, I must have missed it. It just makes me appreciate you more SG. So here is my question, saw a few responses about non US buying to US stock market…after reading several articles about diversification, it would seem appropriate to ask how US buys into non US stock markets? I have seen discussion about ETFs, is that the only way to go about it? Also, with the FATCA coming down, are stocks included in the reporting as well?

    My sincerest thanks.

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