Investing Basics

The Stock Market: What Every Beginner Should Know

Introduction

The average millionaire has seven different streams of income and the stock market is consistently one of them. Learning how to leverage the stock market is critical for people who seek to be wealthy.

Investing in the stock market isn't just for the wealthy or people who have finance degrees. It's for anyone seeking to grow their money. In this article, you'll learn the fundamental concepts of the stock market, including key terminology, how companies go public, what makes a stock price change, and the risks to trading.

What Is a Stock?

A stock, also called a share, represents partial ownership of a company.

You can profit off a stock in two ways:

  • Dividends: A portion of the company's profits that may be distributed to shareholders.
  • Capital Gains: The increase in the value of your stock over time. If you buy a stock at $50 and its price rises to $75, you've gained $25 per share in potential profit when you sell.

Shareholders also typically have the right to vote on important company matters such as electing board members, approving mergers, or any other company change.

How Do Stocks Get to the Market?

Before a company's stock is available to the general public, it goes through a process called an Initial Public Offering or IPO.

Typically the process looks like this:

  • A company starts privately owned, with its founders and employees.
  • When they are ready to go public a company works with investment banks to determine the IPO.
  • Right before the stock goes public, big investors and wealthy individuals will have the first chance to invest, providing initial capital called the 'underwriting' process.
  • On the IPO date, shares become available to the public on stock exchanges.
  • Companies primarily choose to go public to raise capital for expansion. This means being able to expand operations, hire new people, and open new markets.
  • After the IPO, the stock trades freely on the market, with its price determined by supply and demand among investors.

Why Do Stock Prices Go Up and Down?

Stock prices are constantly changing day to day, and at its basic level it's all because of the supply and demand of the stock. When more people want to buy a stock (demand) than sell it (supply), the prices go up. Conversely, when more people want to sell than buy, the price falls.

This now begs the question why do people's demand for a stock change which has several factors:

  • Company Performance: Did the company report strong earnings? Announce Positive developments?
  • External Factors: New Laws, Trade Policies, Changes in Price of Materials, Changes in Production Methods, Shifting Costs of Labor
  • Investor Sentiment: Fear or Greed can sway markets
  • Internal Factors: Leadership Changes, Bad Publicity

Key Stock Market Terms You Should Know

Stock Exchange

A Market where stocks are bought and sold. Major U.S. exchanges consist of the New York Stock Exchange (NYSE) and National Association of Securities Dealers Automated Quotations (NASDAQ), but nowadays anyone can easily access them through brokerage service apps such as Robinhood.

Ticker Symbol

A unique series of letters assigned to a company. For example, Apple's ticker symbol is AAPL.

Market Capitalization

The total dollar value of a company's shares. It is calculated by the number of current shares multiplied by current share price. This gauges companies size and worth. This can indicate growth potential and risk level. Smaller market cap indicates bigger growth potential and high risk while larger market cap is the opposite.

Bull vs. Bear Market

A bull market refers to a rising market with optimistic investor sentiment, while a bear market describes a declining market with pessimistic sentiment.

Portfolio

The collection of investments owned by an individual or organization.

Volatility

The degree of variation in a stock's price over time. Higher volatility means more dramatic price swings and potentially higher risk, though possibly higher rewards as well.

Conclusion

Investing in the stock market is one of many ways to build wealth over time. While the market does experience short-term volatility, we have seen that long-term investors are rewarded.

Just like any other investment the greatest asset is time. So the earlier you start, the more your money can grow through the empowerment of compounding. Start small, the stock market may be intimidating at first, but the best way is to educate yourself and then try it with money you don't mind losing.