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damien's avatar

How does the stock Market work? In layman's terms?

Asked by damien (2399points) October 4th, 2008 from iPhone

If I buy one Apple share when it’s say $100, then two weeks later, it’s at $120.. If I sell, I make $20, right?

Above is how I imagine it works, but everytime I look at a different stockbroking web site, I end up getting confused with all the jargon and left feeling I’m missing something.

Can someone explain it in laymans terms, for a complete beginner?

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11 Answers

Snoopy's avatar

Take your pick of answers

iJimmy's avatar

That’s it in layman’s terms. But you are going to have broker fees and investment income tax on top of that. So 20 bucks is not your profit.

googlybear's avatar

When you buy the 1 share of stock of AAPl for $100 you would pay a fee for purchasing the share (say $9.95). When you sell the one share of AAPL for $120 you would pay a fee for selling your share (say $9.95). So your profit is $120 (selling price) – $100 (purchase price) – $9.95 commission – $9.95 commission = $.10 In addition there would probably be a surcharge for the one share of maybe a few cents. There would be a capital gains tax on the $.10 you made and since you held it in the short-term it would not be eligible for long term capital gains (let’s say 26% is your tax rate). So your total gains are $0.10—$.026=$.074. 7 cents for 2 weeks return plus you had the added opportunity of risking your entire $100 (say you had picked Washington Mutual instead of Apple). Your $100 investment would have looked appealing but been very very very risky for little gain….

That’s why it’s a better idea to invest for the long term and purchase over time (a method called dollar cost averaging). One week Apple sells for $100 you buy a share. The next week, you buy Apple when it dips to $80….the next week at $90, etc.
If I were you, I would watch stocks for a few weeks in your business section of newspaper or on and do your research. Just because a company is well-known doesn’t mean it might be the best investment for you…

Snoopy's avatar

@googly I believe the taxes would be on the $20, wouldn’t it? I don’t think the IRS allows you to give tax free fees/commissions…?

So in your example above, you would actually be in the hole….

damien's avatar

Okay, I think I see it a little clearer now. @googlybear, that makes what I’ve been seeing about automatic weekly or monthly investments make a little more sense now.. That would be buying a number of stocks on a regular basis so you can sell them in bulk when the price is right (and in turn, make more because less is spent on the commission fees)?

I was just using apple as an example because reading about their stock prices got me thinking about it again..

scamp's avatar

sorry for the off topic comment. I’m am growing punch drunk from boredom at work today. But doesn’t it look like iJimmy and snoopy in the first 2 posts are looking at each other in a Brady Bunch kind of way??

Snoopy's avatar

@scamp. “Here’s a story. Of a man named Brady….”


Good catch!

iJimmy's avatar

…Who was living with three boys of his own

Hi up there.

Snoopy's avatar

Hellooooooo down there.

….They were four men. Living all together. Yet they were all alone :(


googlybear's avatar

@snoopy: Actually, the fees and commissions would be part of your “cost basis” as these are required costs incurred to purchase/sell the stock if I am not mistaken….

Snoopy's avatar

@googly. I don’t know myself….? Something for me to ask my CFP, though! :)

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