Stock Market Basics: A beginning investor's guide for the ways of the stock market and stock trading.
The stock market is not a simple "market" anyone can go to. It involves a simple but at the same time a complicated process that investors should know to better reap the benefits it presents
If you are planning to grow your wealth and invest in the stock market, you probably heard of the wide-ranging opportunities it presents that could help you achieve your financial goals. But despite this, it might still scare you because of those news and stories about investors losing a considerable amount of their investments. And you are not alone, many are afraid of investing because of the risks associated with it, but almost all things have risks, investing is no exception from that.
Investing in the stock market means dealing with both opportunities and risks, but these risks can be averted when approached in a disciplined and informed manner. Before setting your eyes on a new thing, you need to have decent knowledge because if not, you are just heading to the unknown (at least in your perspective). And heading to the unknown without a decent amount of knowledge and information is too risky, increasing the likelihood of failure.
One such unknown for new investors is the stock market. If you do not know anything about the stock market, then the stock trading information being shown in the news nor those charts and data presented in the newspaper might sound and look like nothing but gibberish to you. If you are a long-term and passive investor (for retirements, etc.), knowing very little might work for you. But if you want to be like those ultra-rich individuals who have the majority of their wealth coming from stocks, you need to understand and have a basic understanding of the stock market and stock trading.
What is a Stock?
To comprehend the stock market, you need first to understand the meaning of the first word. So, what is a stock?
A stock, also called a share, is a representation of ownership to a company. This representation further represents a proportionate claim on its asset and earnings. In simple terms, an investor who owns a stock owns a slice of the company. This ownership is equal to the stock the investor holds divided by the total outstanding shares. Outstanding shares of companies and corporations are most of the time stands at millions or billions.
By owning stocks, an investor is positioned to gain or lose depending on the company's performance and other factors, including the stock price.
Stocks, like others, have types as well, and these are the Common Stocks and the Preferred Stocks. Common stocks are stocks that represent ownership. Investors who have common stocks can receive dividends and profits from the increased value of shares. They also get one vote per share in the "election" of board members. But when the company hits bankruptcy, investors who hold common stocks are among the last to receive money and payment after creditors, bondholders, and preferred stockholders.
On the other hand, preferred stock represents a degree of ownership. But unlike common stockholders, preferred stockholders do not have voting rights, and their dividends are declared before the common stocks. They also take precedence over common stockholders in receiving payment if the company or corporation declared bankruptcy.
What is a stock market?
By adding the word "market" at the end of the word, "stock" will give you "stock market," which can loosely mean a place where you can buy and sell stocks. But the stock market is not the actual market as it is a collective term that refers to all the stocks being traded in a specific region. It is often represented as an index or grouping such as the S&P 500.
The market that facilitates investment in stocks is the stock exchanges that make up the stock market, like the National Association of Securities Dealers Automated Quotations (Nasdaq) and the New York Stock Exchange.
What is a stock exchange?
The stock exchange is the actual market or infrastructure that facilitates trading. It is a platform that facilitates investments, where one can sell and buy stocks. It lists stocks that attract companies and investors alike. Companies sell stocks to raise capital while the investors buy the stocks for gains and profit since their investments will naturally be invested in the same company or business. Further, it tracks the demand and supply and, therefore, the price of stocks which is dependent on these two factors.
Though the stock exchange is a marketplace that facilitates the buy and sells of stocks, it is not like the typical market where individuals can simply buy the things they want. If you're going to buy a stock, you need to go to a broker.
What is a stockbroker?
A stockbroker is an intermediary between the investors and the stock exchange. Brokers represent individual traders and act and deal with the stock exchange on the investors' behalf. Since an ordinary investor does not have access to the stock exchange, brokers do the transactions on their behalf for a small brokerage fee. Every stockbroker has to be registered as a trading member and shall have a stockbroker license.
Individual investors can find these brokers online. Online Stockbrokers have meager fees that make investing easier. Opening a brokerage account on these online stock brokers is also easy. Some online brokers beginners can choose are Ally Invest, E*TRADE, Vanguard, Fidelity, Ameritrade, Charles Schwab, etc.
The ways of the Stock Market
When people talk about the stock market's upward and downward direction or trend, they probably refer to the market indexes. These market indexes, such as the S&P 500, Nasdaq Composite, and Dow Jones Industrial Average, track a group of stocks. These stocks represent the whole market or specific sectors of it like consumer discretionary, energy, information technology, industrials, consumer staples, financials, utilities, etc.
Investors use these indexes as a benchmark for the performance of their portfolios. In some instances, the performance of the indexes also assists investors in making informed stock trading decisions. On the other hand, some investors invest in the whole index through exchange-traded funds and index funds.
To avoid more significant risks, investors are always advised to maintain a diversified portfolio and stay on that portfolio no matter what. By these, the slump of some stocks in the portfolio can be cushioned by the gain in some. But others prefer stock trading because of the possible gains in short market events.
Stock trading refers to the frequent selling and buying of stocks in an attempt to time the market. The goal of investors in stock trading is to sell stocks when to gain profit and buy stocks when they are low in the assumption that these stocks will bounce back or grow. Stock traders trade throughout the day, while the others called active traders are those who place a dozen or more trades in a month.
In an attempt to have better trades, stock traders use tools and charts to find trading opportunities. Online brokers offer different trading tools, market research, trading information to attract traders.
Stock Market and Stock Trading Vocabulary
Regardless of your status of being anew status, it is possible that you already heard some stock market and stock trading jargon. With the information and communication advancement of the current time, it is not surprising that you are familiar with some of the terminologies used in this "field." But familiarity is different from understanding it, so your understanding of them might be minimal though you heard the terms. So, here are some of the largely-used terms in the stock market and stock trading you need to know:
Bear market and Bull market
Disregarding the reference from the animals, bear market and bull market are important terms new investors should understand. A bear market is a market reference for falling prices of stocks. The basis for saying it varies, but if the prices of stocks are falling at 20% or more across the several indexes, then the market can already be classified as such. On the other hand, the reverse is true for a bull market. It is a period that ranges from months to years where stock prices are constantly on the rise.
Both bear and bull markets signify economic patterns. If the stock prices are experiencing sustained growth, it can be inferred that investors are generally confident and the economy is growing. While if the prices are experiencing a sustained period of falling prices, then it means the opposite.
The bull market tends to be longer than the bear market, and they often follow each other, so in the long run, if you purchased some investments or stocks, it could still experience a rebound and further growth.
Stock Market Crash and Stock Market Correction
Both stock market crash and stock market correction refer to the fall of stock prices, but they have different characteristics. Stock market correction refers to events when prices drop between 10% and 20% from a recent high. These drops are not specifically negative, as the correction of prices can be a reflection of the true long-term value of the stocks. Corrections may happen in both short and long periods. The good news is that the average correction only lasts to three and four months.
On the other hand, a market crash refers to the sudden drop in stock prices, which could signify the beginning of a bear market and economic decline or trouble. Aside from the sudden drop, market crashes are characterized as a sharp plunge in the different market indexes.
Investing has inherent risks and vulnerabilities. As an investor, you cannot totally and perfectly avoid the bear market, corrections, and crashes no matter how informed you are. These market phenomena can happen anytime as a result of various factors. But what you can do to minimize the risks is avoiding the practice of putting all your eggs in one basket, avoiding an undiversified portfolio. If you are a new investor planning to invest in the stock market, be sure to have a diversified portfolio to avoid too many risks and have a "breathing space" when needed.