Investing for Beginners: Stock Market Basics

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Investing for Beginners: Stock Market Basics


Stocks

If you're very new to the stock market, you may be wondering what a stock really is. Very simply, it's a share of ownership in a company. When you own one or more shares of stock, you are called a shareholder, and as such, you are entitled to a representative portion of the company's profits, which are sometimes paid out as dividends.

Types of Stock

There are basically two main types of stock: common and preferred. Common stock represents the majority of stock. It represents ownership in a company and a claim on a portion of profits, or dividends. The dividend amount fluctuates and is not guaranteed. Shareholders are entitled to one vote per share to elect board members, who oversee the major decisions made by the company's management. In the long run, common stock yields higher returns than most other investments.

Preferred stock represents a degree of ownership in a company but usually doesn't include voting rights. With this type of stock, shareholders are usually guaranteed a fixed dividend amount.

Purchasing Stock

Once you've decided to invest in the stock market, you must decide how you'll buy stocks. There are two main ways to do this. The first is through a full-service broker. Full-service brokers offer you financial planning and advice on selecting investments, and are usually the most expensive way to purchase shares of stock. However, if you don't have the time or know-how to select and manage your investments, it can be a very beneficial arrangement.


The second way to purchase stocks is through a discount broker.These brokers work with investors who are willing and able to research and make their own investment decisions. Discount brokers do not offer financial advice and charge low trading commissions.

Stock Trading

Most stocks are traded on exchanges. An exchange is a place where buyers and sellers meet and decide on a price. Most exchanges are physical locations, such as the New York Stock Exchange (NYSE), while others are virtual or over-the-counter (OTC). Virtual exchanges consist of a network of computers where trades are made electronically. The Nasdaq is the most popular example of a virtual exchange.

Why Stock Prices Change

The price of a stock is generally determined by supply and demand. For instance, if there are more people who want to buy a stock than people who want to sell it, the price will rise. This is because shares of that stock are more rare, and people are willing to pay a higher price for them. The opposite is also true. If there are a lot of shares of stock for sale but no one wants to buy them, the price will quickly drop. Because of these factors, the stock market can appear to have great fluctuations.

Understanding supply and demand is easy. What is difficult to comprehend is what makes people like a particular stock and dislike another stock. Basically, the price movement of a stock indicates what investors feel a company is worth – but don't equate a company's value with the stock price, as that is not always an accurate indicator.

The Bulls and the Bears

A bull market is when the economy is in good shape,the unemployment rate is low, and stock prices are rising. It's easy to pick stocks during a bull market because everything is going up. Beware that bull markets can't last forever, and sometimes lead to disaster if stocks become overvalued.

A bear market occurs when the economy is in bad shape, recession is impending and stock prices take a dive. It is very difficult to pick high-performing stocks during such a time. However, some investors prefer to purchase stock in a bear market, while the prices are low, and stick with them until the prices go back up.


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