Understanding the Stock Market Better

stock market index

Investing in the stock market can be intimidating. Grow your confidence as an investor by understanding the stock market better.

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Not fully understanding the stock market is a big part of what deters potential stockholders from investing in the stock market. But understanding the stock market doesn’t need to be hard. With a little stock market 101 you can learn important stock market terms and start investing like a pro.

 

Learning how to invest in the stock market is an important part of building a financial portfolio and saving for the future. It is also often the most viable way to grow your money and preserve its worth.

 

What is the Stock Market?

 

The first key to understanding the stock market better is understanding what the stock market is.

 

The stock market is where investors, traders, and stock holders can buy, sell, and trade in stock. Stock or shares represent a partial ownership within a company. Companies offer stock in their company to traders and investors in order to grow profits and measure their business success.

 

The stock market might also be referred to as the stock exchange, equity market, or share market. There are both public and private stock markets. Stock market investing is usually done through stock brokers or electronic trading platforms.

 

By investing in stock you can grow your financial portfolio, diversify your assets, and build wealth.

 

Do you feel like you’re understanding the stock market better yet? Don’t worry, we’re going to dive even deeper.

 

Stock Market 101

 

There are a lot of basic and more complicated things you need to know in order to understand the stock market and successfully participate in it.

 

Healthy finances includes earnings, savings, investing, and protecting. Investing can be an intimidating financial practice to get into if you haven’t already started investing.

 

That’s why we’re here to help you start with the basic stock market 101 you need to know so you too can be a successful stockholder.

 

Stock Market Terms You Need to Know

 

Like with any new endeavor, you need to be familiar with the basic terminology. The major key to understanding the stock market better is in understanding basic stock market terms better.

 

Average Stock Market Return

 

The average stock market return is the average loss or gains of a stock. The average stock market return is calculated by dividing the sum of returns by the number of returns.

 

Earnings Per Share (EPS)

 

Earnings Per Share (EPS) refers to the monetary value of each share. This number comes from dividing the company’s total profits by the number of shares.

 

This number can help you better see the value of each share.

 

Going Public

 

The term Going Public is when a company begins to offer stock at an Initial Public Offering (IPO). This is like the company’s stock market debut.

 

Companies go public in order to raise capital and profits.

 

Initial Public Offering (IPO)

 

When a company decides to go public, they’ll begin by setting up an Initial Public Offering (IPO). An IPO can also be referred to as a stock market launch.

 

In an IPO the company will offer shares of the company to be sold to investors. Usually several investment banks or brokers are involved in setting up the IPO.

 

Once a company does an IPO they turn from a privately held company to a public one. Choosing to do an IPO can help a company raise more capital, profits, and investors.

 

Market Cap

 

Market Cap is a term short for Market Capitalization. This refers to the market value of a company’s shares. This number is calculated by taking the share price and multiplying it by the number of total shares.

 

Market Capitalization or Market Cap can help company’s see the overall market value of their company.

 

Stock Market Crash

 

A Stock Market Crash occurs when there are more people selling their stocks than people buying stocks and the prices of many stocks fall dramatically.

 

Shares, Stock, or Equity

 

A share can also be referred to as stock or equity. Stock is a piece of ownership in a company. A company that participates in the stock market will divide ownership up into units called stock or shares. That way, investors can own percentages of the company.

 

This doesn’t necessarily mean investors who own stock in a company have any say in how the company operates since many of these shares make up very small percentages of company ownership.

 

Ticker Symbol or Stock Symbol

 

The Ticker Symbol or the Stock Symbol is the unique identifier for shares. It is an abbreviation that can consist of letters and numbers.

 

Underwriter

 

Underwriters are financial institutions like investment banks. They are paid to manage all the paperwork involved when a company goes public.

 

Mutual Fund

 

A Mutual Fund is an investment pool that many investors can all be a part of. Mutual funds are open investment pools that are managed professionally.

 

They also allow many investors to find investment strength in greater numbers. Because of this Mutual Funds are great investment strategies for individuals and anyone new to investing.

 

Portfolio

 

A career portfolio contains a collection of important samples and pieces of work that show your expertise and skill. Likewise, a financial portfolio or investment portfolio is your collection of financial assets, resources, and achievements.

 

Your house, your car, and your income are all things that might be in a typical person’s financial portfolio. When you invest, those stocks, bonds, commodities, or accounts are all included in your portfolio.

 

Having a wide and diverse investment portfolio can help grow wealth and better set individuals up for financial success and stability.

 

Assets

 

An asset is quite simply, a financial resource. Assets are something you own that have financial value.

 

Assets can be both tangible or intangible. For instance, your home could be considered a tangible asset while your skills as a musician would be an intangible asset.

 

Diversification

 

Diversification is when an investor buys stock and holds onto them. They don’t worry about day to day fluctuations in stock values because they are investing for long term results.

 

Shareholder

 

Shareholders can also be called stockholders. They can be an individual person or an entire institution or company.

 

Shareholders are anyone that owns stock in a company. Some major shareholders are members of the company.

 

Common Stock

 

Common stocks have voting rights that let the shareholders of common stocks vote on company matters. Shareholders with common stock own a part of the company.

 

Preferred Stock

 

Shareholders with preferred stock do not have any voting rights. Preferred stock can offer shareholders higher dividends in the long term.

 

Trading Volumes

 

Trading volume is talking about the number of stocks changing hands each day.

 

Voting Rights

 

Some stockholders have voting rights while others do not. Voting rights let stockholders vote on company matters like policy, board director membership, securities, mergers, dividend approvals, and operations.

 

The number of votes a shareholder gets usually depends on how many shares they have. So the more company shares you own, the more weight your vote has on the company.

 

Annual General Meeting (AGM)

 

Each year companies will have what’s called an Annual General Meeting (AGM). at this meeting will be shareholders and members of the board.

 

Board of Directors

 

The board of the directors are the people who supervise a business’s activities and operations. Together they will manage and make decisions about the company.

 

Dividends

 

A dividend is an allowance of a company’s profit that gets paid to certain shareholders. Companies pay dividends to shareholders when they earn a surplus of profit. This surplus then gets divided between shareholders and reinvesting in the company.

 

Capital Stock

 

Capital stock is the total amount of both common and preferred stock that a company has. It is also the maximum amount of shares a company is allowed to have out at one time.

 

The Different Stock Markets

 

Now that you understand basic stock market terms better, the next key is understanding different stock exchanges and how they work. Knowing about different stock markets will help your understanding of the stock market go from average to pro.

 

The stock market or the stock exchange is where stockbrokers, traders, and investors can buy and sell shares of stock, bonds, and other financial instruments.

 

Most trading can now be done electronically through any of the major stock markets. There are stock markets, stock market indexes, and receipts that let you trade in foreign stock to consider when looking for a place to buy and sell shares.

 

The New York Stock Exchange (NYSE)

 

The NYSE is a US-based stock market in New York City. The NYSE building is located at 11 Wall Street and was declared a National Historic Landmark in 1978.

 

The NYSE is one of the largest stock exchange markets in the world.

 

National Association of Securities Dealers Automated Quotation System (Nasdaq)

 

Nasdaq is another US-based stock market exchange. It can be found also in New York City at One Liberty Plaza.

 

Nasdaq is the second largest stock exchange after the NYSE.

 

Dow Jones Industrial Average (DJIA) Stock Market Index

 

The Dow Jones Industrial Average, S&P Dow Jones, Dow Jones, or simply Dow is a stock market index. A stock market index measures stock performance.

 

Dow Jones measures the stock performance of large companies in the US. Stock market indices like this one help stockholders and brokers see how the stock market is doing so they can make decisions about their own finances and shares.

 

There are many other stock exchange indices to follow as well, like the S&P 500 Index or Russell 3000.

 

American Depository Receipts (ADRs)

 

When investors want to trade in foreign stocks they can either trade directly with foreign stock markets or use receipts like ADRs.

 

American Depository Receipts (ADRs) let US investors buy foreign stocks through US stock markets. Foreign companies will offer ADRs so they can have a presence in US markets and allow their shares to be listed on US markets.

 

How Does the Stock Market Work?

 

Understanding the stock market also entails an understanding of how the stock market works. As a stockholder, you have to know how the stock market works so you can use that knowledge to your advantage when investing.

 

First, companies have to go public and offer up shares of the company on the stock market. Then investors can buy and sell shares of stock in those companies.

 

Companies will let the public know they are offering stock through an IPO which will outline the cost of shares in that company. The company’s worth and how much stock they are issuing are some factors that go into determining what the price of each stock is.

 

After the IPO, the company’s stock can eventually move to the open market like the NYSE. Here on the secondary market, the value of a company’s shares fluctuates according to market values.

 

Companies rely on the market to raise profit for the company and so they can look to the fluctuations in stock value as indicators about how their business is doing.

 

For stockholders, the stock market is kind of like an ongoing auction for bits of a company. By investing in these company shares, investors can grow and strengthen their own financial portfolio and assets.

 

How to Invest in the Stock Market

 

The main thing to consider when deciding to invest in the stock market is that there are potential risks and potential rewards. At the end of the day, investing is about patience and balance.

 

Step 1: Open an Investment Account

 

The first thing you’ll need to do is open an account with an investment company, an investment bank, a stockbroker, or an electronic investing system like investment apps.

 

Step 2: Decide on an Approach

 

There is a spectrum with stock market investing. On each end of the spectrum are the extremes of either taking risks or being conservative with your investing approach.

 

High risk stocks have the potential to be very lucrative, but also run the risk of losing money. Risky stocks tend to include products and companies that may or may not do well.

 

Low risk stocks won’t make as much money even when they are successful, but will grow money more steadily and securely. Safe stocks often include things that will always be in demand like precious metals or housing.

 

Diversification between the two extremes is often the best approach to take with investing. Instead of investing everything into one venture, consider spreading out your investments between several different kinds of ventures to improve investment stability.

 

Step 3: Buy Stocks

 

Now you’re ready to decide on which stocks to invest in and start buying shares.

 

One great place to start your investing is in mutual funds or Exchange-Traded Fund (ETFs). These types of investment funds allow you to buy stock in bulk or join a pool of other investors rather than investing alone.

 

In Conclusion,

 

Investing in the stock market is a process. It’ll take some practice and getting used to before you really feel like you have the hang of it. There are both risks and rewards to balance and consider and key stock market terms to remember.

 

In the end, choosing to have a diversified portfolio will help you reap rewards when times are good and minimize losses when times are worse.


Sources


Investopedia. “Stock Market,” by James Chen.

Nerdwallet. “Stock Market Basics: What Beginner Investors Should Know,” by Arielle O’Shea, Kevin Voigt.

The Balance. “An Introduction to the Stock Market,” by Joshua Kennon.