A Beginner’s Guide to the Stock Market

 A Beginner’s Guide to the Stock Market

1. What is the Stock Market?

The stock market is the lay term used to describe the platform where stocks are traded, i.e. bought and sold. It is a virtual market where the publicly owned shares of any company are issued and traded either through “over-the-counter” markets or stock exchanges. 

For the companies involved, the stock market enables them to get access to the capital they need to expand their business by selling a part of their company’s ownership rights to public and private investors.

On the other hand, the stock market is a great platform for investors to grow small amounts of money exponentially by trading these stocks or receiving dividends from the profits that the companies make. This allows them to assume the position of a business owner without the risks and sacrifices associated with initiating a business venture. 

2. Stocks

A stock represents a claim to the ownership of a company. Being in possession of a company’s stock means that you are one of the company’s shareholders. As such, you are entitled to a share of the profits (dividends) and assets in case the company goes bankrupt. 

Traditionally, a stock was symbolized by a stock certificate—a document which was issued by the brokerage to act as proof of your ownership of the stock. As the times have changed, however, the ownership of stocks has become fully digitized and brokerages have now resorted to electronically storing these records.

Types of Stocks

· Common Stock – the majority of stock issued by companies is referred to as common stock. These entitle you to a share of the profits, a claim to the ownership of the company and sometimes a single stock warrants you a vote to elect the board members of the company. 

As a beginner, it is advisable that you start out with common stock as they yield more profit in the long run. However, you should also be prepared to shoulder more risk in case of bankruptcy because common shareholders are much lower in the hierarchy of compensation. Creditors, preferred shareholders and bondholders are put on a higher pedestal.

· Preferred stock – similar to common stock, preferred stock afford you a degree of ownership of the company. However, the voting rights are not guaranteed as with common stock although this entirely depends on the policies of the company. With preferred stock, however, you are assured of dividends from the company for as long as you hold the stocks. 

Unlike common stocks, the dividends are fixed, not variable. Additionally, in the event of liquidation of assets, preferred shareholders are prioritized before common shareholders although this is after the company’s debts have been settled. This type of stock is subject to repurchase from the company at any given time, but it is often at a higher rate. 

3. Trading of Stocks

Stocks are mainly traded on exchanges. These are places (both physical and virtual) where buyers and sellers meet to determine the price of different stocks. Stock markets facilitate the trading of securities in a bid to minimize the risk associated with stocks. They offer a platform to the shareholders of different companies to trade the stocks they hold. 

This is because; solely depending on the company whose stock you own to grow your small investment is a risky move since anything can happen. As such, stock markets give you the chance to meet interested buyers to whom you can sell the stocks at a profit or a loss depending on how the company is performing. 

The NYSE (New York Stock Exchange) is the biggest exchange in the world. It features a more physical approach to the trading, whereby the traders have face-to-face encounters on the floor. Here, the prices are determined by auction. As a beginner, the NYSE is not something you should expect to deal with unless you plan to specialize on the stock market beyond the virtual realm.

Your focus should be on the NASDAQ, which is the biggest over-the-counter exchange market. Here, everything is computerized including the trading which is done through a network of dealers. 

There are two types of stock markets:

· Primary Markets – this is where companies issue their IPOs and make their securities available to the investors

· Secondary Markets – trading is purely between shareholders. There is no involvement with the companies that issue the securities. 

4. Changing of Stock Prices

Like any other market, the prices of the stocks are determined by supply and demand. When learning how to deal with the stock market for beginners, the key is knowing what it is that makes these prices fluctuate like they do. The simple answer is: the most recent news about a specific company determines how its stock fairs in the market. As such, negative news will lead to less demand for the stock while positive news will increase its demand.

Different investors employ different strategies when deciding which stock is worth investing in. As such, the operating theory is that the investors’ impression of a company directly affects the worth of its stocks. 

Do not make the rookie mistake of equating a company’s value to the price of its stock; this is often misleading. The company’s current value is referred to as its market capitalization which is obtained by multiplying the current price of its stock with the number of shares issued. 

The best way to determine which stocks are valuable and which ones are not is by looking at the earnings (profit margins) of the companies. This is an effective technique for obvious reasons since failing companies do not stay in business for long. On the other hand, a company that enjoys wider profit margins is more likely to pay better dividends and as such, the value of its stock is higher. The beauty of all this is that public companies are obligated to disclose their earnings every three months (these periods are known as quarters). Analysts then use this information to base their projection of the company’s future performances. 

While it is not possible to predict the changes in stock prices, a few fundamental principles can help you to find your way through the complicated world of stock exchange:

· In a nutshell, market forces like demand and supply determine the performance of any stock

· In theory, the investors’ sentiments have more influence on the company’s stock than any other external force. Granted they too rely on the company’s earnings to make their valuations, there is no proven method that can be used to predict the changes in prices of stock.

5. Purchasing Stocks

With all this information, you are now capable of knowing how to get started in the stock market. Buying stocks can be done in two ways: 

· Brokerages – this is the most commonly used method of buying stock due to the convenience. Herein, there are also two types of brokers. The first are full-service brokers who, aside from selling you the stocks, teach you how to manage them and even give you a couple of useful tips. The other, cheaper option is the discount brokerages whose service stops at selling you the stocks. 

· Dividend Reinvestment Plans – DRIPs offer existing shareholders more equity at a discounted price. This can be a good way to increase your stock gradually and regularly.

In conclusion, learning the ropes in the stock market requires a bit of a personal touch as no two strategies are entirely the same. The best you can do for yourself is to study and absorb as much information as you can before you settle into your own way of investing. In a market with no right way of doing things, the chances of being wrong are also very slim.