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Stock Market Basics: A Beginner’s Guide to Investing and Trading

Way down, at the southern tip of Manhattan, stood a buttonwood tree. The New York Stock Exchange can trace its origins to a meeting there in 1792. Since those simple beginnings trading of stocks has become hugely complex.

Want to invest in stocks? Read on to learn about stock market basics like investing and trading.

What are Stocks and Shares?

A shareholder owns shares in a particular company. A share certificate is a piece of paper that represents ownership of part of that company.

When an investor is said to own stocks then that means they own shares in any company. The difference between the meaning of the words stocks and shares is so obscure that the words are used interchangeably.

Owning a share in the company means you own a part of the company. You might own a share for as little as $5. You are also entitled to a share in the profits of that company.

What Is a Stock Market?

A stock market is where buyers and sellers of stocks meet to trade in those stocks. The meeting need not be face to face now. Technology has changed the way this trading happens and it’s now a long way from the original stock exchanges.

Brokers represent the traders who wish to buy or sell stocks. Much of the business is carried out online. The largest stock market in the world by value is the New York Stock Exchange.

The stock market exchange tracks trading activity including the supply and demand for shares. This includes monitoring the price at which shares are being traded.

Stock Market Indexes

News programs often summarize stock market activity by referring to the stock market indexes. They may be described as “up” or “down.” These stock market indexes monitor the performance of a selection of stocks.

The indexes focus on specify sectors in the market. For example, mining, technology or smaller businesses. These indexes help investors and other observers understand how shares are doing compared to a relevant group of other shares.

Examples of indexes you are likely to hear about are the Nasdaq, Dow Jones Industrial Average and Standard & Poor’s 500. Research these to learn more about what shares they report on.

Bulls and Bears

Strange descriptions are used for activity in the stock exchange markets. The terms bull market and bear market are graphic ways of indicating whether the markets are buoyant or falling.

A Bull market is one where prices are on the up. A bear market is where prices are falling. The fall has to be significant, of the order of 20%, to be a bear market.

Various stocks are rising while others are falling, all the time. For the market to be described as a bear market there has to be a general fall. The general indexes would indicate an overall fall.

Crash, Correction, and Volatility

If there is a general and dramatic fall in the value of stock this is described as a crash. A bounce back from a crash is described as a market correction. These movements are examples of market volatility.

The more volatile the market, the less predictable it is. It’s possible to make a great deal of money if you are buying and selling shares in a volatile market so long as you buy low and sell high. The problem is that it is as likely that you buy high and sell low and lose money.

These movements in price look all the more unpredictable over the short term. If you check a particular indexes performance online you are able to view a graph of the performance over time. Looking at performance over a day or week can look very different from performance over a year or several years.

While performance might be good over a 10 year period there could be losses in any one year. In the 92 years to 2017, returns were over 10% in 54 years and negative in 24 years. It’s clear that taking a long-term view reduces the effect of this volatility.

Spread the Risk

Taking a long-term view spreads the risk of investing over a longer period. The expectation is those good years will compensate for bad years. It’s hoped that the overall result will be positive.

The same approach can be taken with the choice of stocks. Investing in a mix of stocks means the risk is spread. This diversification strategy takes lots of time and effort to get right.

A successful diversified portfolio of stocks can only be achieved with research of the market over time. It’s possible to achieve a similar result by investing in a mutual fund. That is a managed group of investments that are already diversified.

A mutual fund invests your money along with the money of other investors in a basket of stocks. They may reflect an index and seek to track or exceed the performance of one of the recognized indexes.

You could do a little of both. Invest in specific businesses you believe in and then invest the rest of your portfolio in an index fund. Whatever you choose to do, learn more about investment strategy to improve your management of risk.

Stock Market Basics

If you want to start trading in stocks you will need to do so through a licensed brokerage firm or stockbroker. They make the trade on your behalf and charge a commission or fee.

There are full-service brokers who do research, give advice and have a personal relationship with you. Their services don’t come cheap.

A budget broker can action the trades for you with a no frills. Online brokers also offer low-cost trading services.

The process starts with a stock quote. This tells you the highest price someone in the market is prepared to pay for the stock. It also tells you the lowest price that somebody in the market is prepared to sell it.

You make a bid to buy or an offer to sell and wait to see if you have a trade.

A Note of Caution

Buying and selling shares can be a way of making money. The people that make the most money from shares are large institutions with massive resources, people who know more than stock market basics. They put these resources into research and use state of the art technology to support decision making and trading.

Trading in stocks can be fun. If you trade with the understanding that there are risks and are prepared to lose what you invest then you can enjoy it. Diversification, a long-term focus, and investing in mutual funds can reduce your risk further.

Learn more about managing your portfolio.