Basic Stock Market Concepts You Must Know

A stock market is a place for trading shares of publicly listed companies. A Stock Exchange primarily facilitates the stockbrokers. They trade different company stocks and other securities that are listed. One thing to mention is that this public listing part is very crucial here. A stock can be bought or sold only when it is listed. The target of the stock market is to collect investment to achieve the income or growth of a company. These are professionally handled by an Investment Bank . Now, as we have come to know what the stock market is, there are various reasons you can become interested to invest in the stock market. It can simply be a desire to earn some extra cash or to invest in your future. Let’s discuss some key concepts regarding the stock market that you should know before you jump into this new and fascinating world.

What It Means To Buy A Stock

Almost all big companies have shareholders. A shareholder is a person that owns shares of a company. And it is considered one of the owners. Public companies are unique at some point. They start to sell small shares of their business to the common people through an initial public offering (IPO). Once that is done, everyone can buy shares of that company. Therefore, if you have an Investment plan & purchase any share, you’re buying a small piece of ownership in that company through that financial investment. This enables you to vote on different shareholder issues, collect your share of the profits, and be a part of their growth through the rise in the stock price.

Preferred Stock vs. Common Stock

As we spoke, until now, the common stock allows a person to vote in company decisions, collect his parts of the profit, in the form of dividends . And as the bigger picture be a part of the companies growth through stock price growth. In the case of preferred stock, the shareholder has different rights, more often having a preferred dividend, while loosing the stock appreciation. Basically, a preferred stock is a hybrid between a common stock and a bond.

Index

An index is an indicator or measure of changes in a security market. It consist of a hypothetical collection of shares of different companies representing the market that would like to track and compare. These help in several different ways. An index helps to understand how a set of companies or sectors are doing and analyze them. Helping investors compare current and past prices to create a Benchmark for the performance of a portfolio.

IPO

IPO, also known as an initial public offering, marks the first time a company goes public with its stocks. The biggest reason companies do this is to raise cash. As a company offers its IPO, it can get a huge amount of money from selling its shares. Each big IPOs get hyped and are tons of fun to watch and track. But to be honest, as a beginner, there are better places for you to invest in, the reason, big investors tend to get most shares of a hot IPOs.

Market Cap

Market cap is otherwise known as market capitalization, which is used to explain how big a company is, in other words, is the total value of a company. It is calculated by multiplying the price of a stock times the number of shares outstanding of the company.There is an official categorization of companies according to market cap like nano-cap stock, micro-cap stock, small-cap stock, large caps and so on. These classes represent the range of that company's market capitalization.

Sector & Industry

The terms sector and industry in Stock Exchange generally describe the type of business that the company operates. According to the Global Industry Classification Standard (GICS), stocks are classified into 11 major sectors. Within each of those sectors, there are industry groups, industries, and sub-industries. Each of these categories has its own sets of traits and properties. But you should keep your arms wide open to all of them as depending on your investing style. Stocks can be found all across the market.

Investing Style

It is not very ideal to run and gun in the stock market while buying shares. There are several styles of investing, such as value investing, growth investing, income, penny stock, and many more. Each of these styles has its facilities. Such as income investment is a dividend style investment would ensure a steady income through the dividend distribution. Therefore, each individual needs to understand their financial planning and personal goals to choose the right investing style according to their profile and expectations.

Dividend

When buying a share of a company in the Stock Exchange, you're giving a small amount of money to buy a tiny share of that business. And in return, that company on a regular basis will pay you an equal part of their profit as any other shareholder. This Return on Investment (ROI) is called the dividend. Its amount depends on several things such the companies total profit and the dividend policy . However, it is a pretty reliable source of income if you know what you are doing. Some mature companies even provides higher dividend yields than bonds at current low interest rate levels. Those companies are called dividends aristocrats

Bull vs. Bear market

When people discuss a bull market, they normally refer to an environment where stock prices are not only going up but also are expected to keep going up shortly. These represent the good times when the national economy is running healthy, and stocks keep going higher. On the contrary, a bear market is a market when the market experience long declines, typically it will see that more than 20% declines across various crucial indexes.

Trying to time the market

All the top researchers and financial advisor of Wall Street suggest that trying to time the market is extremely difficult for an average stock market investor. And will most likely cause him more harm than good. Two main reasons that make it a bad strategy to try out for a beginner. First of all, it’s really hard for the average investor to catch the stock market pattern. Second, the typically small calculation mistake. Missing out the best days of a rally. To give an idea of what could represent this miscalculation, of you missed the top 10 days in the stock market from Jan. 1, 1999 to Jan. 2, 2019, your overall return will be cut in half. Yes only 10 days in 20 years gave you half of the profits.