Whether you wish to invest savings into a future nest egg, or you want to begin actively trading, the stock market is a great place to start. Any first-time investment may seem daunting, but to quote Mellody Hobson: “The biggest risk of all is not taking one.”
Investing and trading are essentially allocating financial resources into assets with the hope of securing a profit in the short or long term. The stock market is one of the best avenues to online trading. In this guide on “How to invest in the stock market for beginners,” we will give you an introduction to this potentially lucrative and certainly exciting market!
What is The Stock Market?
The stock market refers to the many exchanges worldwide selling shares (stock) of publicly-traded companies. In effect, it is the global meeting place of buyers and sellers of stocks. Under the broader umbrella of the stock market, there are individual stock exchanges. Nasdaq (National Association of Securities Dealers Automated Quotations) and the NYSE (New York Stock Exchange) are such examples.
Alongside shares (equity stock) of public companies, traders and brokers can also purchase other securities such as bonds or exchange-traded funds (ETFs). There are 16 stock exchanges around the world where each has a total market capitalization of over $1 trillion (the “$1 Trillion Club“). While the stock market differs to, say, forex in that there are physical exchanges and on-site trading floors, the majority (80%) is automated.
Major Players Of The Stock Market
The United States holds most of the global stock market cap, with U.S stocks representing 56% of the total value. The largest by far is the New York Stock Exchange. As of October 2021, the NYSE had a market cap of more than $28.2 trillion. Moreover, the NYSE is arguably the most well-known and traditional. Traders need to be in formal attire before entering the trading floor. One of the biggest globally, the NYSE trades a staggering $1,46 billion of shares every month.
How Does The Stock Market Work?
In simple terms, people (traders, investors, brokers) buy and sell stocks. Each stock stands for ownership (“equity”) in a publicly listed corporation. The owners of the stocks (“shareholders”) have voting rights on the company alongside a percentage of their capital gains. Generally, shareholders will be paid dividends from stocks every quarter.
As traders and investors buy and sell shares, the prices are affected by what is known as “supply and demand.” Not all companies are listed on the stock exchange. Companies can offer shares to increase their liquidity, but there are costs to bear in mind. A growing company or startup that requires capital for associated costs can sell shares instead of borrowing money. The moment a company goes public and lists shares is known as its initial public offering or IPO. Traders buying and selling shares on the stock market are purchasing not from the company itself but another shareholder.
Bull vs Bear
You may have come across the terms “bull” and “bear” (or “bullish” and “bearish”) when reading around how to invest in the stock market as a beginner. A bear market is going down, and a bull market is going up. This means that prices are on the up in the case of a bull or bullish market. The opposite is true with a bear market. Investors and traders may use the terms “bearish” and “bullish” to describe their attitude towards specific stocks (as well as how the market as a whole is performing).
There are various explanations as to the origins of these terms. One simple theory is that bears would attack by bringing their paws down on their opponent (prices falling). In contrast, bulls strike by sweeping their horns upwards (prices rising). Another less common supposition is that the term “bear” derives from tradesmen (in the old-fashioned sense of the word referring to people with goods at a market) selling bearskins. The bull was then the obvious counterpart to bear, as the two animals were known for blood sports (bullfighting versus bear fighting).
Tips for Beginners – Common Stock Market Terms
Bid-ask spread: When talking about financial assets or securities, the bid-ask spread (or “bid-offer spread”) is the difference between the ask price and the sell price. The highest amount that the buyer will pay is the “bid price,” and the lowest they will accept is the “ask price.”
Technical analysis: This trading approach takes data on past price history to predict future trends. Traders using technical analysis would plot mathematical indicators such as moving averages onto price charts to forecast price patterns.
Fundamental analysis: Traders using fundamental analysis would assess a company’s financial statements, economic data such as earnings and employment rates, and competitors’ financial information to inform their trades.
Liquidity: In terms of financial markets, liquidity means how easily an asset or security can be converted into cash (without any impact on its market value).
Stock options: Using stock options, an investor has the right to buy (or sell) stock on a date and at a price agreed upon in advance. Investors or traders are essentially betting that a stock will rise or fall in price and trading accordingly.
Acquisitions: When a company buys all or the majority of another’s shares, that is known as a “stock acquisition.” Whichever company owns over 50% of the stock has the right to make corporate decisions without shareholders’ votes.
Unicorns: A “unicorn” is a privately-owned startup valued at over $1 billion.
Index or Indices: A stock market index is a basket or bundle of stocks purchased together. Indices demonstrate the value of a part of the stock market and are used by investors to assess overall market value and performance. Three of the biggest indices in the United States are the NASDAQ, the S&P 500, and the Dow Jones Industrial Average (DJIA).
Over-the-Counter: Stocks listed “over-the-counter” (OTC) can only be bought and sold via a broker. OTC stocks are not listed on the major stock exchanges, often being smaller companies without the requisite specifications.
How Do You Invest in The Stock Market?
To access the stock exchange, you need a stockbroker. Once you have the right broker by your side, you can decide which shares or other securities you wish to purchase. Of course, before plunging your capital into the market, it is vital to have a trading strategy and long-term game plan. Do ample research on the stocks you are interested in, and assess your budget and risk control plan before taking the first step.
As a beginner trader asking yourself, “How do I invest in the stock market” the trading platform that you choose is critical. Ideally, your broker will operate as more than a mere middleman but an aide with technical and fundamental analysis tools. For instance, here at TradeOr, we ensure all our clients get premium access to the best charting software, TradingView.
This powerful program lets you create custom price charts to plot technical indicators and predict the price direction. Having an idea of where prices are headed is key to trading with success, and we want only the best for our traders. Moreover, TradingView connects you to a global community of 30 million fellow investors – an invaluable source of market information, support, and strategies. We also charge zero commission or hidden fees, and our customer support team is always on hand for any questions you may have.
Entering any new financial market is daunting, but with the right trading tools and market information at your fingertips, the stock market is a great start for beginner traders.
- How does the stock market work?
The stock market is the collection of stock exchanges (e.g., the NYSE or Nasdaq) through which buyers and sellers trade stocks. Companies wishing to sell shares list themselves on a stock exchange, and investors and traders can then buy and sell shares online.
- How to start investing in the stock market?
Investing in the stock market has never been easier. You can invest in shares or stock mutual funds via an online investment account. For many, the simplest answer to "how do you invest in the stock market" is to find an online broker like TradeOr and start trading stocks and other securities in minutes of opening an account!
- How many stocks are in the stock market?
Each stock exchange will have its number of total listed stocks. The largest stock exchange worldwide is the New York Stock Exchange (NYSE) which lists approximately 2,400 stocks. The NYSE has a total valuation of $26.2 trillion.