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Stock Market Basics - A Beginner's Guide to Investing in Stocks

Aug 02, 2023

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You’ll see TV news about the stock market every night, including how particular companies have fared. The media assumes you know how the market works and want to know how it’s doing. Surely, everyone has heard about investing in the stock market to make short-term or long-term profits.

But it can be scary for beginners, without knowing how it works and what pushes stock prices up and down. Researching and educating oneself on basic stock market terms can make things easy. Here is a look at the basics you need to know about stock market investing.

What is the stock market?


The stock market is where business owners raise capital for their enterprises when they can’t get bank loans. Companies can simply go public, giving anyone who wants the chance to buy into their business through an initial public offering (IPO). Investors pay a certain amount to own a small part (share) of a company.

Companies sell many shares and grow their business leading to more profit. They can put some of that profit towards developing new products. They can also give some of that money to investors as dividends.

Issuing dividends is unnecessary, but it helps motivate people to buy more stocks. It gets the attention of investors who failed to buy the first time. They can offer to buy some shares from original investors, paying more than the original price in return.

They hope that the high-performing company will keep thriving so they can sell their shares for even more. That’s the stock market. Shareholders receive dividends plus any increase in share prices. However, the opposite can happen, too. Investments can shrink if companies underperform. You can even lose all your money.

Why do people invest in stocks?


People buy and sell tiny pieces of companies for various reasons. Some hope to make a quick buck. Others are in for the long haul, hoping to grow their wealth over time. Each strategy offers unique benefits and risks.

But the underlying concept is that the value of stocks can balloon over time. As mentioned, they can generate income in the form of dividends. Also, stocks can diversify a portfolio and reduce risk.

However, you need to understand key stock market terms before investing. These include:

  • Stock:  A fractional ownership in a company.

  • Bull market: A market situation characterized by rising share prices

  • Bear market: A market situation described by falling share prices

  • Stock exchange: A marketplace for stocks

  • Ticker symbol: A stock-identifying symbol

  • Bid price: The highest amount a buyer can offer for a stock.

  • Ask price: The lowest price a seller is willing to accept for a stock.

  • Volume: The overall shares of a stock traded on a given day.

  • Liquidity: The ease of buying or selling a stock

  • Dividend: Payment made to shareholders out of a company’s profit

  • Market order: A directive to buy or sell a stock at the current price

  • Limit order: A directive to buy or sell a stock at a particular price or better


What are stock market indices


Market indices are shares selected to track a particular sector's performance or the whole market. Some leading indices include the S&P 500, Dow Jones Industrial Average, and Nasdaq Composite. You can use indices to track segments in a particular sector and see how your particular investment is performing relative to the industry.

What are index funds?


While market indices are measurement tools, index funds are funds set up to replicate the performance of specific market indices. Individuals can set up mutual funds or exchange-traded funds (EFTs) that closely resemble the composition of underlying indices.

Companies set up mutual funds and sold through the company’s end-of-day net asset value (NAV) price. On the other hand, ETFs can be bought and sold on stock exchanges just like stocks.

Tips for investing in stocks


Whether investing for quick gains or to grow wealth over a long period, you need to do your homework lest you lose your money. Here’s a breakdown of tips for investing in the stock market:

  • Set specific, measurable, achievable, relevant, and time-bound investment goals

  • Identify stocks to watch. Pick well-managed companies that show competitive advantage and are reasonably valued.

  • Conduct fundamental and technical analysis. Examine financial statements, market trends, competitive advantage, brand value, public perception, etc., and stock price movements to identify patterns and trends.

  • Pick asset classes across different industries and geographical locations based on your goals.

  • Set stop-loss orders

  • Have a positive mindset


Wrap-up


The stock market presents various opportunities to invest and earn returns. Use the above tips to get started. If you need further guidance, visit the website mentioned above and sign up for newsletters to stay up–to–date on the latest market trends.

Tags: English