When you buy shares of a particular company you are looking to make a profit through price rising, through dividend payments, or from both.
You cannot simply walk into an exchange and start buying shares. Only a limited number of people are allowed to trade in a stock exchange. These people are called brokers, and all transactions in a stock exchange go through them.
To trade any financial instrument, you need to register yourself with a broker. These days, it is more common to use online brokers.
In this guide, we discuss the information you need so you can take the first step in your stock market trading and investing journey.
NOTE: You can get your free stock market for beginners PDF below.
Table of Contents
A stock exchange is a location where buying, selling, and issuing shares of publicly traded companies is carried out regularly.
A country might have several stock exchanges, and all of these exchanges put together form what we call the stock market.
These exchanges provide a trading platform where anyone can buy or sell the shares of a given company, and this is done by linking buyers and sellers together so that transactions can occur.
For example, say you place an order with your broker for buying 200 shares of Apple at a given price. Your broker will then transmit this order to the stock exchange, where you will be linked to someone who wants to sell 200 shares of Apple at your given price.
The transaction will then be executed, and the broker will take a fee for their services.
The first thing you need to know about a share is that it is a form of ownership, i.e., when you buy a share of a company, you own a small piece of the company.
Suppose a company has 1000 shares, and you own 150 of them, then you’re a 15% owner of the company. In reality, companies have hundreds of thousands of shares floating around, so your piece of ownership will likely be tiny.
Another crucial bit of information is that there are two kinds of markets: primary and secondary.
Whenever a company wants to go public, they do so usually through an Initial Public Offering (IPO). This means that shares are offered to the public, and they can apply for these shares.
The company then allots these shares to people who applied. A portion of the shares is usually retained by the company owners so that they can maintain ownership. This is done through the primary market.
However, once the company has issued the shares in the primary market, investors and traders can buy and sell these shares in the secondary market. The company that originally issued these shares is not involved in these transactions, and these are carried out between buyers and sellers in the market itself.
A stock’s prices are determined the same way prices for any other good are decided upon in the market; the point at which the supply and demand curve for the stock intersect. If the supply of a particular stock is higher than the demand for it, implying that many people are willing to sell but not enough people want to buy the stock, the stock price will go down.
People will try to reduce their asking price to sell the stock somehow, causing prices to fall even further until the point where demand and supply curves intersect, and equilibrium is reached.
If the demand for a particular stock is higher than its supply, implying that there are more buyers than sellers, the price will go up as people are willing to pay a higher amount of money to purchase the stock. This will cause an increase in the share price until the point where equilibrium is attained.
The demand and supply for a particular stock can be affected by many factors, each of which can cause an upward or downward movement in the stock price. Some of these factors, along with how they affect share prices, have been discussed below:
If you’re interested in trading stocks, then there are two main trading strategies you need to be aware of; technical analysis and fundamental analysis.
Both of these forms of analysis enable you to identify the right shares to invest in/trade. But first, it is important to understand the difference between trading and investing.
When you invest in a company, you do so with the expectations that you will profit in two ways: dividends that the company pays out when it has profits and an appreciation in the company’s share price over the long term. This appreciation is usually due to the company consistently having profits, increasing its market share, and operating efficiently.
However, trading is completely different. The time horizons involved with trading are usually a week or a day, and in some cases, traders only hold stocks for a few seconds. Trading aims at profiting through fluctuations in the share prices over a short period of time.
Whether you’re planning to trade or invest in the stock market, you will have to choose the right strategy that matches your needs.
Technical analysis is most commonly used for trading only. It involves studying price patterns and trends and using these to forecast future price movements so that action can be taken accordingly. This is usually done in two main ways:
There are several known patterns that traders look for in a particular stock to trade accordingly and try to profit. Depending on whether the technical analysis says a stock will go up or down, traders can take positions appropriately.
Traders often use several technical indicators while studying chart patterns, such as Moving Averages, Bollinger Bands, and the Relative Strength Index. Each of these indicates a different kind of price action, and traders usually try out indicators in different combinations until they can figure out which one works best for them.
Fundamental analysis is most commonly used by investors and was popularized by Warren Buffet as a good way to consistently profit in the stock market over long periods of time. It involves analyzing the company in great detail to understand the fundamental principles behind the business model that the company operates under. This is done by:
Once this process has been concluded and viable companies have been identified, investors then buy shares of these companies and hold them. When the company prospers, the share price increases accordingly, and the investor profits from being the part-owner in a successful, profitable company.
Occasionally, even fundamental investors use technical analysis once they have identified companies they want to invest in. This is done so that optimal points can be identified where the stock is at its lowest, thus maximizing profits for the investors.
A stock dividend is, put very simply, a share in the profits of a company. As mentioned earlier, owning a share in the company means that you’re the company’s part-owner. Therefore, you are entitled to a share in the profits of the company.
Whenever a publicly traded company declares a profit, they retain part of it to finance their future operations and expansions. However, the rest of the profit is paid out to the shareholders in the form of dividends.
Some companies pay more dividends than others; hence their shares are more valuable since there is the possibility of a dual benefit: a dividend and an appreciation in the share price. Thus, owning shares in companies that pay high dividends is a good way to generate passive income as an investor.
Stock exchanges usually have thousands of stocks that you can choose from to trade and invest in. These stocks can be classified in various ways, such as based on their sector, the country they are headquartered in, and the total value of their stocks.
However, say you want to know how the entirety of a particular sector is doing. It is not feasible or easy for you to look at every company in that sector to understand the overall position of the sector.
In such cases, stock market indexes can come in handy. An index is basically a collection of stocks that have something or the other in common. They can be classified on any basis, such as:
Indexes are an excellent way of keeping an eye on an entire sector or economy together.
In addition to this, they can also be used as a tool for diversification if you want to invest across the board in an entire sector or economy without limiting yourself to one company. Index funds allow you to invest your money across the entire index in a fixed pre-determined ratio.
Every major country has its own stock exchange(s) where shares are issued and traded regularly.
Its market capitalization is the number of shares it has issued multiplied by the share price for any given company. For example, suppose a company has 100 shares of $5 each, then the market capitalization of the company is $500.
The market capitalization of a stock exchange, on the other hand, is the sum of the market capitalizations of every company whose shares are traded in that particular exchange. Based on the exchange market capitalization, the top 10 biggest stock exchanges around the world are:
Each of these exchanges also has its own index, which comprises the largest companies traded in the particular exchange. Most online brokers can trade in multiple exchanges, allowing their users to trade on several markets simultaneously.
NOTE: You can get your free stock market for beginners PDF below.
