Stock Market Basics – Everything Beginners Need to Know

You might have heard that investing in stocks is a wonderful way to create wealth over time. Well, this is certainly true, but do you know how the stock market works? If your answer is ‘no’, then you’re not alone.

If the stock market is not your forte, then it may seem like financial jargon to you. But if you are a beginner who is looking to understand what the stock market is, you’re in the right place. We have decoded everything you need to know about how stock trading works in simple, layman’s language. Let’s start from the very basics:

What Is a Stock?

Also referred to as equities, a share of stock represents an ownership interest in a company. For example, if you buy a share of ‘Apple’, you now own a small portion of the business and get to enjoy a share in the success of the company.

What Is the Stock Market?

It’s a platform where publicly traded companies’ stocks are purchased or sold so investors can buy shares of a company’s stock and thereby take ownership of a part of that company. So, for example, if a company has issued 100 shares and you own one of them, you now own a 1% stake in that company. When a company decides to go public, it will issue shares of stock which would then be traded on the stock market.

A stock exchange is a place (could be a physical or electronic one), where sellers and buyers gather to trade stocks. It lists all the companies that are available to trade together with their current share prices. Buyers and sellers can share their opinions on how much they think it is worth investing in.

As a key component of the economy, the stock market is a great indicator of its overall health. The performance of companies on the stock market reflects on the present economic conditions. The value of shares will fluctuate, depending on supply and demand. When more people want to buy the stock, the price would go up, and vice versa.

The value of a stock can also depend on other factors, such as investor sentiment, economic conditions, and the performance of the company. When a company announces a new service or product, the value could increase since the investors would expect increased revenue. Stock market investments are subject to market volatility and investors should be ready for both, potential gains and losses.

How Are Prices Determined in The Stock Market?

It is governed by supply and demand. At any given point in time, there is always a maximum price someone is willing to pay for a certain stock (the bid price) and a minimum price someone else is willing to set (the asking price). You can think of it like an auction, where buyers are constantly bidding for stocks that other investors are willing to sell.

There are many catalysts behind triggering the market up or down. For instance, during the 2022 stock market downturn, with inflation fears and supply chain issues, the stock market performed rather poorly, and we saw stock prices generally decline.

How To Invest in Shares?

There are two ways you can buy shares:

• Through a broker who will facilitate buying and selling shares for you.
• Buying directly from the exchange, in which case you don’t need a broker. Rather, you will purchase from the exchange itself and pay a small transaction fee for it.

Why Invest in The Stock Market?

We invest in shares to grow our wealth in the long run. Many people perceive shares as a risky investment, but putting your money in the right shares can offer great returns that can even beat inflation. It could be a better investment option than gold or real estate if done right. This is why it’s so important that you consider some important points before investing in the stock market.

• Look at the company’s financial health. Make sure to do a thorough study of the financial statements, annual reports, and sales growth for the past few years. If you see that the sales and profits are growing consistently, then it’s a good sign to go ahead
• If you want to sell shares in the future, see the stock’s liquidity. You can do this by checking how many shares are traded daily and how much discount is there on the stock price from its original value.
• See if the current price is expensive or too cheap when compared to other stocks of similar business lines or growth trends.
• Purchase shares from companies with a good dividend payout ratio. This gives information as to how much that company has used to pay dividends to its stockholders.

Investing in the stock market requires a lot of patience, foresight, and discipline. Let’s take a quick look at some tips for investing in the stock market:

• Be very clear about your objectives. A lot of people buy shares hoping that they would become millionaires instantly. It doesn’t work that way, because stocks can offer high returns, but they are far riskier than other investments.
• Be realistic about your finances. It’s very important to understand that stocks are not an investment option for everyone. Investors need to have a substantial sum of disposable income, so
• they are also prepared for any losses, should they occur.
• It’s very easy to be tempted by terms such as ‘windfall profits’, but overnight gains rarely happen in real life, contrary to what is sometimes portrayed in adverts.
• Don’t rely solely on stock-based information, tips, or advice from others; always do your research in analyzing stocks, researching about the company, and understanding its business prospects.

In conclusion, the stock market is a complex system, but it is also one of the most consistent and powerful sources of wealth creation. There are too many technicalities involved in this subject that cannot be covered in one article, but the key takeaway is that the stock market can be volatile, with many ups and downs. It also involves risk, which is exactly why you need to be well-versed in this topic before you choose to invest.