Before you invest in the stock market, it is important to understand basic terminology, principles, and strategies in order to improve your opportunity for financial success.
Stock market investing can be a slippery slope. There is a learning curve you need to work your way through to find profit. The good news is that we have made it easier for you to get a jump-start on the learning process by putting together some basic concepts so help you get started.
What are Stocks?
While this may seem like a basic question, many investors are not able to properly answer it. Stocks represent share ownership in the underlying company or organization. They represent a financial claim to the company’s income and assets. Stock ownership can be represented by a physical stock certificate, although most investors of today choose to own their shares electronically within a brokerage account. Companies issue stock as a method of raising capital. Companies can also issue bonds as a method of raising debt capital.
Different Types of Stock
There are several different types of stock to consider:
- Common Stock- The most ‘common’ form of stock issued, giving the owner the right to capital appreciation and dividends from the underlying company.
- Preferred Stock- A similar ownership as common stock, yet investors are not typically granted the same voting rights.
How Stocks Trade
Most stocks trade on exchanges, such as the well known New York Stock Exchange (NYSE). Exchanges allow buyers and sellers to exchange shares of stock at an agreed-upon price. The primary market refers to where securities are created and sold, while the secondary market refers to where previously issued securities are bought and sold. In addition to the NYSE, many investors may have heard of the NASDAQ, and over the counter market. Unlike the NYSE, trading does not occur on a trading floor, but rather electronically.
The price of a stock will vary daily, even by the minute, based upon the market. Supply and demand factors will drive stock prices up and down, allowing investors to capitalize on market movements. When supply is low and demand is high, the price is driven upward. Likewise, when demand is low and supply is high, the price declines.
Another significant factor that drives stock price is earnings reported by the underlying company. Earnings affect the overall profitability of the company. Given the theories of what drives a stock’s price, there are still circumstances that can cause the value to increase despite fundamentals. For example, during the late 1990s, internet companies experienced a sharp price boom despite earnings reports which did not match up.
Building a Portfolio
When investors begin to build their portfolio, they generally design an overall financial plan first. A financial plan enables investors to consider their current age, investment time frame, investment goals, current assets, and risk tolerance when building an asset allocation for their portfolio. Asset allocation refers to diversifying assets into a variety of asset classes, allowing you to maximize return while minimizing risk.
With some basic understanding of stock market basics, you can begin to work toward achieving your financial goals and objectives.
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