Millions of people either hold stock or are actively trading their stocks. If you want to be one of these people, stocks can help you build wealth or to have a stable retirement, but you might be confused about all the jargon surrounding trading stocks. Things are especially confusing for beginners who might not know what all this means. However, you do not need to know everything when starting, but there are some basics you should understand before you do.
Stock Market Basics
Stocks are traded on the stock market, which is made up of different exchanges. These exchanges work as places where buyers and sellers congregate to trade shares. The stock market works like any other corporation, with the stock market having opening hours and days.
If you want to trade stocks, your orders will go through on these days. Do note that the stock market and exchanges are closed on holidays. These are called trading holidays, and you can check out a comprehensive list of trading holidays to know when the stock market and exchanges will not be open and trading.
Stock trades are placed by brokers who represent individual traders. They are in direct contact with the exchange so when you make an order, you are actually instructing the broker to complete the trade on an exchange for you. These days most traders operate online, and this is where a vast majority of trades happen.
When the market is moving up and down, that is usually the movement of the price of an index. A market index tracks the price of the stocks of major companies. Some indexes also track specific sectors, with sectors like technology and manufacturing being popular indexes.
Indexes are very useful in tracking a market’s performance and play a significant role in informing trading and investment strategies.
Regular and Dividend Stocks
Regular stocks are shares of a company that shareholders own. To get the price of a share, you take the company’s value – its market capitalization – and divide that by the number of shares offered to investors. As the company’s value increases, typically through increasing profits or by other metrics, the price of its stocks increases.
The price of stocks is also determined by supply and demand, where more demand for a stock means a higher price.
To make money with regular shares, you buy the shares at a price you deem appropriate and then wait for the price to increase. The difference between the starting and final prices determines your profit or loss. You calculate the total profit or loss by multiplying this number with the number of shares you own.
Dividend stocks, on the other hand, work a bit differently. You still profit when the price increases, but you also get a dividend at the end of every calendar or financial year. The dividend is decided upon and approved by a board of governors, and the total sum is typically a percentage of the company’s profits.
As long as the company is doing well and there is nothing else hindering its payment, you will get paid a dividend for every share you own.
Bull and Bear Markets
A bear market is one where the price of shares is falling. A market is declared as such when the price of stocks falls by over 20% across different indexes. Bull markets are the opposite of bear markets, and they typically follow each other in a cyclical fashion.
The best thing about stocks is that bull markets typically last longer than bear markets, which is one of the reasons why stock trading is so profitable in the long term.
Understanding the basics above should help you understand how the market moves and what shares are all about. The only thing that remains is choosing some stocks and investing in suitable ones.