The stock market is a platform where shares (or stocks) of publicly traded companies are bought and sold. It plays a crucial role in the economy by allowing companies to raise capital from investors and providing individuals with opportunities to invest in these companies. Here are the key basics:
1. What Are Stocks?
- Stocks (shares) represent ownership in a company. When you buy a share, you own a portion of that company.
- Types of Stocks:
Common Stocks:
Shareholders have voting rights and may receive dividends, but they are last in line to be paid if the company goes bankrupt.
Preferred Stocks:
Shareholders do not typically have voting rights, but they receive dividends before common shareholders and have a higher claim on assets in case of liquidation.
2. Stock Markets
- A stock market is where buyers and sellers meet to trade shares. The two main types of stock markets are:
Primary Market:
Where companies issue new shares to the public through Initial Public Offerings (IPOs).
Secondary Market:
Where existing shares are traded among investors. Major stock exchanges include the New York Stock Exchange (NYSE) and NASDAQ.
3. How Stocks Are Traded
- Buyers and sellers:
Investors place orders through brokers, and transactions occur when there’s a match between the buyer’s price and the seller’s price. - Stock Prices:
Determined by supply and demand. If more people want to buy a stock (demand) than sell it (supply), the price goes up. Conversely, if more want to sell, the price goes down. - Stock Ticker Symbol:
Each company is identified by a unique symbol. For example, Apple’s ticker is AAPL.
4. Stock Indices
- Stock indices track the performance of a group of stocks to measure the market’s overall performance. Examples include:
S&P 500:
Tracks 500 of the largest U.S. companies.
Dow Jones Industrial Average (DJIA):
Tracks 30 significant U.S. companies.
NASDAQ Composite:
Includes many technology companies.
5. Key Players
- Retail Investors:
Individual investors trade stocks for personal wealth building. - Institutional Investors:
Large organizations, such as mutual funds or pension funds, that buy and sell large quantities of shares. - Brokers:
Licensed firms or individuals who execute buy/sell orders on behalf of investors.
6. Types of Orders
- Market Order:
Buys or sells stock immediately at the current price. - Limit Order:
Sets a specific price at which to buy or sell. - Stop Order:
Converts into a market order when a certain price is reached, used to limit losses.
7. Why People Invest in Stocks
- Capital Gains:
Profit made when selling a stock for more than it was purchased. - Dividends:
Some companies distribute a portion of their profits to shareholders regularly. - Long-Term Growth:
Stocks have historically provided better returns than many other investments over the long term.
8. Risks of Stock Market Investing
- Market Risk:
Stocks can lose value due to overall market downturns. - Company Risk:
A particular company can underperform, causing its stock price to drop. - Liquidity Risk:
Difficulty selling a stock without lowering its price significantly. - Economic and Political Risk:
External factors like economic downturns or political instability can impact the market.