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 on 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 other 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 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 the 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 to 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
Long term investors tend to purchase many different 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
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