Introduction to Investing
1. What is a Stock? How Does the Stock Market Function?
Learning Objective:
Understand the concept of stocks and how the stock market operates, including how prices are determined and why the market fluctuates.
What is a Stock?
A stock represents ownership in a company. When you purchase a stock, you own a share of that company, making you a shareholder. As a shareholder, you are entitled to a portion of the company’s profits, typically through dividends, and you may also benefit if the value of the stock increases.
· Key Features of Stocks:
Equity Ownership: Buying a stock gives you partial ownership in the company.
Dividends: Some companies pay shareholders a portion of their profits.
Capital Appreciation: The value of a stock can increase or decrease based on the company’s performance and market conditions.
· Why Do Companies Issue Stock?
To raise capital for expansion, research, debt repayment, or other business operations.
How Does the Stock Market Function?
The stock market is where buyers and sellers come together to trade shares of publicly listed companies. Stock prices fluctuate based on supply and demand, company performance, and broader economic factors.
· Key Components of the Stock Market:
Supply and Demand: Prices fluctuate based on the number of buyers and sellers in the market.
Market Participants: Includes individual investors, institutional investors (e.g., pension funds, mutual funds), and traders.
Market Sentiment: Investor confidence, economic news, and geopolitical events can cause market prices to rise or fall.
· Market Volatility:
Short-term fluctuations in stock prices can be caused by company-specific news or broader economic factors. Understanding this volatility is key to making informed investment decisions.
2. The Role of Stock Exchanges
Learning Objective:
Learn about the major stock exchanges and how they facilitate the trading of stocks.
What is a Stock Exchange?
A stock exchange is a regulated marketplace where stocks, bonds, and other securities are bought and sold. The two largest stock exchanges in the U.S. are the New York Stock Exchange (NYSE) and the NASDAQ.
New York Stock Exchange (NYSE):
Founded in 1792, the NYSE is the largest stock exchange in the world by market capitalization.
Trading Method: Traditionally, the NYSE used an auction-based system with floor traders, but it has since evolved to incorporate electronic trading.
NASDAQ:
Founded in 1971, the NASDAQ is known for being the first electronic stock market, specializing in technology and growth companies.
Trading Method: Unlike the NYSE, NASDAQ operates entirely electronically, making it faster and more efficient for traders.
How Stock Exchanges Work:
Stock exchanges provide a platform for companies to list their shares and for investors to buy and sell those shares. They ensure transparency, liquidity, and regulation in the trading process.
· Listing on an Exchange:
Companies must meet certain requirements (e.g., size, profitability) to be listed on a major exchange like the NYSE or NASDAQ.
Being listed provides credibility and allows the company to raise funds by selling shares to the public.
· Market Indices:
Stock exchanges often track key market indices, such as the S&P 500 and the Dow Jones Industrial Average, which measure the performance of a group of large companies. These indices serve as benchmarks for the overall market’s performance.
3. How to Buy and Sell Stocks
Learning Objective:
Understand the practical steps to buying and selling stocks, including how to use brokerage accounts and different types of stock orders.
How to Buy Stocks:
To purchase stocks, you need to open a brokerage account with a financial institution or an online broker. Once your account is set up, you can place orders to buy stocks.
Steps to Buying Stocks:
Open a Brokerage Account: Choose between a traditional broker or an online broker. Many online brokers offer low fees and user-friendly platforms.
Fund Your Account: Deposit money into your brokerage account to make purchases.
Research Stocks: Use tools and resources provided by your broker to research companies before buying.
Place an Order: You can place different types of stock orders, depending on your strategy.
Types of Stock Orders:
· Market Order:
A market order is an instruction to buy or sell a stock immediately at the current market price. It guarantees execution but not the price.
· Limit Order:
A limit order specifies the price at which you want to buy or sell a stock. It guarantees the price but not execution, as the order will only be filled if the stock reaches the specified price.
· Stop-Loss Order:
A stop-loss order automatically sells a stock when its price falls to a certain level, helping investors limit potential losses.
How to Sell Stocks:
Selling stocks follows a similar process to buying. You log into your brokerage account, select the stock you want to sell, and choose the type of order you want to place. It’s important to consider factors like timing, tax implications, and your overall investment strategy when deciding to sell.