A Beginner's Guide to the Stock Market
If you're new to the stock market, it's a good idea to start by getting familiar with basic concepts and terms. The stock market is a relatively simple idea that incorporates complex rules and options. Knowing the basics, however, is enough to get you started in the world of stock investing.
What Is the Stock Market?
The stock market is a marketplace for buying and selling shares of stock. Each share grants the holder fractional ownership of the company it represents. The market is made up of buyers and sellers, each seeking to make money on these transactions. Companies issue stock to raise money for a variety of business reasons, such as paying down debt, funding expansion, or expanding research and development.
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Stock Market Basics
You may have heard the saying "buy low, sell high," and this maxim defines the stock market. Traders make money on the stock market by purchasing shares of stock and then reselling them at a higher price. Some traders try to time the market by purchasing shares in companies they expect to do well. For example, traders might buy shares in a company that's due to release a revolutionary new product. They expect that when the product is released, the company's stock will rise. At that point, those traders can sell their shares at a profit.
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What Are Stock Exchanges?
Stock exchanges provide the infrastructure that enables stock trading. The New York Stock Exchange (NYSE), with more than $30 trillion in market capitalization among its listed securities, is the largest stock exchange in the world. Many other national and regional exchanges, such as the London Stock Exchange in England and the Bombay Stock Exchange in India, serve traders all over the world.
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All About Stocks
Stock represents ownership in a company. Each share entitles the owner to a fraction of the company. How much ownership depends on how many shares of stock are outstanding. If 100 shares have been issued, owning one share would entitle the investor to 1% ownership in the company. Of course, most companies issue many more shares than this. Large, established companies may have millions or billions of shares outstanding.
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A Glossary of Stock Market Terms
The stock market has a vast collection of terminology, and it may take years to learn a majority of the language. It's important for beginners to know the most important definitions.
Bear Market
When the stock market undergoes a period of overall price declines, we say it is a bear market. A bear market is usually marked by a 20% decline in stock prices. While the market swings into short-term bear territory regularly (about every three years), longer periods of decline are less frequent. These lengthy declines are usually brought about by widespread economic uncertainty, such as the 2008 global financial crisis or the COVID-19 pandemic.
Bull Market
The opposite of a bear market, a bull market sees stock prices rise (usually by about 20%) for a sustained period. In general, a bull market occurs alongside positive economic indicators, such as low unemployment. The duration of a bull market can vary from a period of months to years. The longest bull market in stock market history started after the 2008 global financial crisis. That bull market began in March 2009 and lasted 11 years, until March 2020.
Dividends
When companies distribute some of their earnings to shareholders, this is called a dividend. Not all companies pay a dividend to shareholders. This is because as new companies grow, they often need to invest most of their earnings back into the company. Once the company is more established, it may start offering dividends, which entice new investors to buy its stock.
Initial Public Offering
When a company begins to sell its stock to the public, this is called an initial public offering (IPO). Because initial public offerings may represent new, untested companies, investing in an IPO can be risky. However, it is an opportunity for investors to buy shares in a new company in the hopes that the company will grow and its stock price will appreciate.
Leverage
In terms of the stock market, leverage is a strategy that involves borrowing money to fund investments. Because the investment money is borrowed, investors may have access to much more capital than they have available in cash. The downside to leverage is that the inherent risk is greater. If an investment does poorly, the investor can lose money, and they still need to pay back the original capital they borrowed.
Margin Trading
Trading on margin is a type of leverage trading in which the investor borrows against shares of stock they already own. As with other leverage strategies, margin trading can magnify gains or losses. This strategy is popular for short selling, in which an investor borrows shares that they expect to decline and then sells those shares. At a later date, the investor buys shares at the lower price and returns those lower-valued shares in repayment for the borrowed shares.
Spread
A stock's spread is the difference between its bid price (the maximum price you're willing to pay for a share) and the asking price (the lowest price you will accept to sell each share). By purchasing shares just above the bid price and selling just below the asking price, traders can make a small percentage on each transaction.
Additional Information About the Stock Market
As a beginner, it's important to research your areas of interest so you can learn more. Fortunately, the Internet offers a wealth of glossaries, lessons, and other educational materials.
- Language of the Stock Market: This in-depth lesson plan offers definitions, assessments, and visual aids.
- Stock Market Simulation: This lesson plan will guide you through teaching others about stocks.
- What's Up With the Stock Market? Lesson plans appropriate for middle and high school provide an introduction to economic concepts.
- An Introduction to the Stock Market: With ample definitions and examples, this is a great place for beginners to start.
- NYSE Made Easy: This article defines common stock market terms and also offers an online knowledge assessment.
- Stock Trading Terms: This in-depth glossary features additional detail on hundreds of terms.
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- What Is Options Trading? Learn all about options trading so you can make good decisions and come out ahead.
- Should You Buy Individual Stocks or Stick to Mutual Funds? Consider whether individual stocks are the best choice for you or if you should keep your money in mutual funds.
- Four Types of Investment Vehicles for a Better Retirement Plan: Learn the differences between stocks, bonds, ETFs, and mutual funds.
- Individual Retirement Arrangements (IRAs): An IRA can be a powerful investment tool for your stock transactions. Learn more from the IRS here.
- Dividend Investing vs. Growth Investing: Should you invest in companies with promising growth potential or firms that pay out regular dividends?
- The Stock Market Game: This educational game makes it easy for students to make their own trades without risking real money.
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