How To Invest In Stocks For Beginners
The stock market is one of the most reliable and accessible ways to create wealth. Thanks to technology, you can now begin your investing journey with as little as $100 – and you can begin learning about the market for free. In this guide we explain what the stock market is, how it operates and how you can get started investing or trading.
Stock Market Definition
A stock market is any collection of exchanges where the shares of publicly listed companies are traded. The global stock market includes all listed stocks and the exchanges they trade on. A country’s stock market would include all exchanges based in the country and the stocks listed on those exchanges.
In some cases, OTC (over the counter) marketplaces may also be considered part of the stock market. OTC markets are marketplaces where unlisted securities are traded.
What is the purpose of the stock market?
Stock markets and stock exchanges exist to give companies access to capital, and to allow investors to find investments that allow them to see positive results on their trading.
Companies and the Economy
For an economy to grow, new companies need to be started and existing companies need to grow. A stock exchange is a regulated marketplace for companies to access capital from investors looking to earn a return on their capital.
From a company’s perspective, an exchange aggregates investor capital which ensures that large companies can access the capital they need.
For investors, a stock exchange, and the stock market in general, is a marketplace for investment opportunities. A stock market provides a platform for investors to buy and sell shares in companies and to access information on those companies. Stock exchanges regulate the trading of stocks, ensure that information is made available to investors and ensure that companies comply with certain requirements.
From the investors perspective a stock exchange aggregates companies in one place.
Traders and Brokers
Stockbrokers act as an intermediary between investors and the exchange. They make sure orders are entered and trades are settled according to the exchange’s rules and guidelines.
Brokers and active traders also provided liquidity to a market. This allows investors to easily buy and sell shares when they needs to. Greater liquidity attracts more investors, which lowers the costs of capital for companies. Traders can benefit from short term price movements in stocks whilst also contributing to the efficiency of a market.
How Does the Stock Market Work?
The stock market’s role can be broken down into two parts: the listing process and trading operations.
To be listed on a stock exchange companies must comply with a number of requirements. Some of these requirements depend on legislation in the country they want to be listed, while others are specific to each exchange. Typically, companies must provide audited financial statements for a certain number of years and have a minimum amount of paid in share capital. In many cases the company’s market value and liquidity will need to meet a minimum threshold.
An OTC market has less onerous listing requirements. Typically, the stocks traded on OTC markets belong to smaller companies and those that don’t meet the requirements of exchanges. OTC stocks are therefore often riskier than publicly listed stocks.
A stock market operates as a continuous auction during which buyers and sellers can enter orders. When buy and sell orders match, a trade occurs. After a trade takes place, cash and shares change hands during a settlement period.
Nowadays nearly all trading is electronic. Exchanges are responsible for making systems available to manage and match orders ,and to settle trades. Orders can only be entered into the system by brokers that are member of the exchange.
Exchanges manage the market with a set of rules that govern issues like trading times and the types of orders that can be entered.
What is a Stock Market Index?
A stock market index is an indicator that reflects the price performance of a collection of shares. The index is a weighted average of the prices of stocks in the index. Most indexes are weighted by the market value of the companies it includes, so larger companies have more influence on the index value.
Indexes can include all the stocks in the market or include companies by size or sector. Headline indexes like the S&P 500, FTSE 100 or Nikkei 225 typically include the largest companies in a given market and typically account for around 85% of the value of listed companies in a market.
Stock Market Instrument Types
Stocks are the primary trading instrument in a stock market. However, as markets have evolved, other instruments related to stocks have emerged. However, all other stock market instruments are based on the prices of stocks.
The terms stocks, shares, and equities can be used interchangeably, and all refer to an equal unit of ownership in a company. Most shares are common shares which entitle their owner to one vote per share and the right to an equal share of any dividends paid. If the company is liquidated, each common share gives its holder an equal claim on remaining assets after creditors are paid.
Non-voting shares are the same as common shares but carry no voting rights. Preference shares are shares that pay fixed dividends and give their holders a preferential claim on assets in the case of liquidation. Preference shares are similar to bonds, but trade on a stock market.
Exchange Traded Funds (ETFs)
ETFs are baskets of shares that are listed on exchanges and trade just like listed companies. ETFs track popular stock indexes like the S&P 500 as well as custom indexes that give investors exposure to specific sectors, industries, and investment themes. Exchange traded funds allow investors to own lots of stocks with just one investment.
Mutual funds are similar to ETFs in that they are investment funds that contain multiple stocks. They differ in three respects though. Firstly, they are actively managed by a fund manager and do not track an index. They are not traded like other instruments – rather, capital is invested in the fund based on the value of the fund each day. Mutual funds are more expensive to own due to the fact that they are actively managed...