Many new investors jump into the stock market based on hearing the hype of how it’s possible to make great money investing this way. They may have heard of a friend who made a bundle with day trading or a colleague who has a hot stock tip, and so they figure they’ll jump into the market too.
Before you begin investing, it’s important that you understand at least the basics of the stock market.
While investing in stocks can help you to build a great investment portfolio, if you’re not careful about your strategies, you could also find it can be a great way to lose a lot of money too.
There are two sections to the stock market. The primary market is where shares are created by companies and generally offered to the public via an IPO (Initial Public Offering). The secondary market is where established stocks are exchanged and traded among investors without the involvement of the company issuing the stocks.
When people think about investing in the stock market, they tend to be talking about the secondary market.
Basics of Stock Market Shares
Shares, or stocks, are individual pieces of ownership of much larger companies. When companies need to raise capital, then sell off little portions of the company so that investors may become partial owners of that company. Each time you buy a stock, it represents a share of ownership in a publicly listed company. You become a shareholder. As you increase the number of stocks you have in one particular company, you increase the percentage of ownership you have.
As a shareholder, you are entitled to your share of the company’s earnings. These are usually paid as dividends, although not all companies offer dividend payments. You’re also entitled to exercise any of the voting rights that might be attached to that stock, however, you don’t have a say in the daily operational running of that business.
Basics of Stock Market Pricing
There are several factors that can affect the price of stocks and you might notice that the price of stocks changes every day. While the price can be partially dictated by supply and demand, there are also factors that can affect the overall price too. Economic changes, unemployment, or bad management in the company are all individual factors that can also affect the pricing.
The price you see listed on any particular stock is based on the perceived profitability of the company and not the value of the company. This means the stock can often be priced based on what investors believe the stocks are worth. The value of the company is called market capitalization.
When you see on the news that the market rose or fell by a number of points, it’s important to understand that not every single stock listed on the exchange followed the same movements. The index you see reported is a representation of a number of stocks and presented as a single figure to give a general idea of the market movements as a whole.
However, there will always be individual companies that move contrarily to the main market sentiment. It’s this contrary movement that day traders watch for, trying to find the next stock pick that will rise in value and gain profits for them.
Basics of Stock Market Investing
There are several types of stock market investment strategies. Day trading is growing in popularity as a way for smaller investors to begin building capital. The basis behind day trading is to buy a stock in the early part of the trading day and hopefully sell it again at a profit before trading closes.
Long term investors tend to purchase many stocks in a diversified range of companies in various sectors to spread their risk. These investors tend to hold stocks for longer periods of time, allowing the value of their stocks to appreciate. They also receive dividend payments, either in the form of a check or as a dividend reinvestment plan, where the company issues stocks to the value of the dividend payments to the shareholder to add to his portfolio.