Stock Market 101: What You Need to Know
What are stocks
Stocks, also known as equities, represent a fractional ownership stake in a company. When an investor buys a stock, they become a shareholder and gain certain rights, including voting, dividends, and capital appreciation. As a company's stock price increases, the value of the shareholder's shares increases. Companies issue stocks to raise capital for operations, such as paying off debt and funding growth plans. But there's more. Let's dive in.
What is the stock market
The stock market definition is a platform where stocks (shares) of publicly-traded companies are bought and sold. It provides a venue for companies to raise capital and for investors to buy ownership in those companies, with the potential for earning returns through dividends and stock price appreciation. The stock market also acts as a barometer for the overall economic health and performance of individual businesses and industries.
What is a stock exchange
A stock exchange is a marketplace where stocks, bonds, and other financial securities are bought and sold. It serves as a regulated platform where investors can trade shares of publicly listed companies. Stock exchanges play a crucial role in the economy by enabling companies to raise capital and allowing investors to invest in businesses and potentially earn returns through price appreciation or dividends.
NYSE
The New York Stock Exchange (NYSE), located in New York City, is the largest and one of the most well-known stock exchanges in the world. Founded in 1792, the exchange is the largest stock exchange globally in terms of market capitalization (as of 2024), which is the total value of all companies listed on the exchange. The NYSE has a traditional trading floor, unlike other exchanges.
Nasdaq
Nasdaq is one of the largest and most important stock exchanges in the world, known for its focus on technology and growth-oriented companies. Founded in 1971, the Nasdaq was the world’s first electronic stock exchange, enabling securities to be traded via a computerized system without the need for a traditional trading floor. The performance of the Nasdaq exchange is often measured by the Nasdaq Composite Index, which tracks the performance of over 3,000 stocks listed on the exchange.
Over-the-counter market
The over-the-counter (OTC) market is a decentralized marketplace where securities, including stocks, bonds, derivatives, and other financial instruments, are traded directly between parties rather than through a formal exchange like NYSE or Nasdaq and can involve smaller or less regulated companies.
How does the stock market work
The stock market works as a platform where investors can buy and sell ownership shares, or stocks, in publicly-traded companies. It enables companies to raise capital and provides investors with opportunities to grow their wealth through price appreciation and dividends. Here's some additional info in the following sections.
Public company and private company
A public company is one that has sold shares of stock to the public through a stock exchange. This means that anyone who buys shares becomes a part-owner of the company. Public companies are listed on stock exchanges like the NYSE or Nasdaq. Investors can freely trade the company’s shares on these exchanges.
A private company is one that is owned by private individuals, families, or groups of investors. The shares of a private company are not available to the public, and ownership is usually restricted to a small group of people. Private companies do not trade their shares on public exchanges. Shares are bought and sold privately, often involving a small group of investors or company insiders.
What is a stock index
A stock index is a statistical measure that tracks the performance of a specific group of stocks, representing a particular portion of the stock market. It provides a snapshot of how the market or a segment of it is performing, helping investors gauge trends and compare individual investments with the broader market. Whether you're tracking the U.S. stock market through the S&P 500 or global trends via indices like the FTSE 100, stock indices can provide vital insights into market performance.
How are stock prices determined
Stock prices are driven primarily by supply and demand, influenced by company performance, market sentiment, and broader economic factors. While fundamentals like earnings and growth are key, external factors such as investor psychology and global events can also cause significant short-term price changes.
Bull and bear stock markets
A bull market and a bear market refer to opposing trends in the stock market, characterized by rising and falling stock prices, respectively. These terms are used to describe investor sentiment, overall market direction, and the performance of investments over a period of time.
A bull market occurs when stock prices are rising or are expected to rise. It is typically associated with strong investor confidence, robust economic growth, and increased investment activity. A bear market occurs when stock prices are falling or are expected to fall. This market is often driven by fear and pessimism, with investors expecting economic conditions to worsen, leading them to sell stocks.
Why invest in the stock market
Investing in the stock market offers several potential benefits, which is why it's a key component of wealth-building for many individuals. This can include the potential higher returns, an opportunity to build wealth and financial independence, liquidity, dividends and income, diversification, a hedge against inflation, and ownership in companies. Some potential risks can include volatility, loss of capital, and market timing.
What are brokerages
A brokerage is a financial firm or institution that acts as an intermediary between buyers and sellers in financial markets, facilitating the buying and selling of securities, such as stocks, bonds, and mutual funds. Brokerages play a crucial role in helping individuals, institutions, and companies invest and trade in financial markets. Different types can include full-services brokerages, discount brokerages, self-directed online platforms, and robo-advisors.
How to invest in the US stock market
Here's a few steps to get you started.
Step 1: Set investment goals
Determine your financial goals and risk tolerance to help define your strategy.
Step 2: Choose an investment account
Select an account such as a standard brokerage account or a retirement account (an IRA, Roth IRA or 401(k)).
Step 3: Select a brokerage
This can include an online platform, a full-service broker, a discount broker, or a robo-advisor. Consider factors like fees, platform usability, customer support, and research tools.
Step 4: Decide what security type to invest in
Choose from different securities such as individual stocks, exchange-traded funds (ETFs), mutual funds, and index funds.
Step 4: Diversify your portfolio
Helps reduce risk by spreading investments across different asset classes, sectors, and geographic regions.
Step 5: Place a trade
Once you've funded your brokerage account and decided what to invest in, you can consider placing your first trade. Select an appropriate order type, such as a market order, limit order or stop-loss order.
Step 6: Monitor and adjust your portfolio
Regularly review your portfolio to ensure it aligns with your goals. Over time, you may want to rebalance your investments by buying more or selling certain assets to maintain your desired risk level.
Step 7: Stay informed and continue learning
Keep current on market news, economic trends, and company performance. Many brokerages provide research tools, and there are numerous financial news outlets and investment resources available online, many for free.
Important stock market terms
Trading
The process of buying or selling shares in a company.
Equity
Represents ownership interest in a company. If you own stock in a company, you own a portion of that company, which is your equity. Stockholders are considered equity holders. Equity value can increase through capital gains (rising stock prices) or dividends (a share of the company’s profits).
Dividend
A payment made by a corporation to its shareholders, usually in the form of cash or additional stock, as a distribution of the company’s profits. It represents a portion of the company's earnings that is returned to investors, typically on a regular basis, such as quarterly or annually.
Stock index
A statistical measure that reflects the performance of a specific group of stocks, representing either a particular sector, market, or the economy as a whole. It tracks the prices and returns of a basket of selected stocks, serving as a benchmark for both investors and analysts to assess overall market trends and performance.
Portfolio
A collection of assets owned by investors. A portfolio can include a wide range of valuables ranging from gold, stocks, funds, derivatives, property, cash equivalents, bonds, etc.
Primary market
The financial market where new securities, such as stocks and bonds, are issued and sold directly to investors for the first time. The primary market enables companies, governments, or other entities to raise capital by offering new securities to the public.
Secondary market
A financial market where investors buy and sell securities that have already been issued and are currently held by others. The secondary market facilitates trading between investors, including stocks, bonds, and other financial instruments.
Bull market
Refers to a period in which the prices of securities, such as stocks, are rising or are expected to rise. The term is most commonly used to describe the stock market but can be applied to anything that is traded, including bonds, currencies, and commodities.
Bear market
Refers to a period in which the prices of securities, such as stocks, experience a sustained decline, typically falling by 20% or more from recent highs. It represents a widespread pessimistic sentiment and can occur in any financial market, including stocks, bonds, real estate, or commodities.
Bid price
The highest price a buyer will pay to buy a specified number of stock shares at any given time.
Ask price
The lowest price that a seller will sell the stock.
FAQs about the stock market
What's the difference between stocks and shares?
Stocks and shares differ in a few ways:
Scope: Stocks refers broadly to ownership in companies and can include various types of equity securities while shares refers to the specific units of ownership in a particular stock. For example, if you say you own shares of Apple, you’re referring specifically to the units you own of Apple’s stock.
Usage: Investors may use stocks when discussing the market as a whole or when talking about investing in general (e.g., "I invest in stocks") while shares can be used when specifying the quantity of ownership (e.g., "I own 50 shares of XYZ Corporation").
Types: Stocks encompass all types of equity investments, including common stocks, preferred stocks, and other equity securities while shares pertain to the actual count of ownership units of those stocks, regardless of their type.
How can I learn stock trading?
Here's few steps to get you started:
Understand what stocks are by familiarizing yourself with them, the different types (common vs. preferred), and how they work in the market. Learn essential terms like dividends, market orders, limit orders, and short selling.
Educate yourself about the stock market by reading the news, taking online courses, and attending webinars (check out moomoo's free ones).
Participate in paper trading to practice trading without risking real money.
Can I practice stock trading for free?
Yes, paper trading is a good way to practice. Here at moomoo, users can build their investment skills and practice trading without any risk with our paper trading app. This feature also enables you to test strategies and understand how trading works. Download it to your desktop or mobile device and you’ll have everything you need to start paper trading within minutes.
What is a dividend in the stock market?
A dividend in the stock market is a payment made by a company to its shareholders, typically as a portion of its profits. Companies distribute dividends as a way to share their financial success with investors. Dividends are usually paid in cash, though they can also be issued in the form of additional shares (known as stock dividends).