A stock market, equity market or share market is the aggregation of buyers and sellers of stocks (also called shares), which represent ownership claims on businesses; these may include securities listed on a public stock exchange, as well as stock that is only traded privately, such as shares of private companies which are sold to investors through equity crowdfunding platforms. Investment in the stock market is most often done via stock brokerages and electronic trading platforms. Investment is usually made with an investment strategy in mind. The workings of the stock market can be confusing. Some people believe investing is a form of gambling and feel that, if you invest, you will likely end up losing your money.
These fears can stem from the personal experiences of family members and friends who suffered similar fates or lived through the Great Depression. These feelings are understandable but aren't grounded in facts. Someone who believes in this line of thinking may not have an in-depth understanding of the stock market, why it exists, and how it works.
Understanding the stock market is essential to making informed trading decisions. You need to know how to choose the right stocks, which requires an in-depth understanding of a company’s annual report and financial statements. Learn how to understand what stock represents in a company and how to determine the true value of any stock.
This allows you to make better investing decisions by avoiding the costly mistake of purchasing a company's stock when the market has pushed its share price too high relative to its value.
Stock Market Terms
The first step to understanding the stock market knows the lingo. Here are a few commonly used words and phrases:
Bull Markets vs. Bear Markets
A bear market means stock prices are falling — thresholds vary, but generally to the tune of 20% or more — across several of the indexes referenced earlier.
Bull markets are followed by bear markets, and vice versa, with both often signaling the start of larger economic patterns. In other words, a bull market typically means investors are confident, which indicates economic growth. A bear market shows investors are pulling back, indicating the economy may do so as well.
The good news is that the average bull market far outlasts the average bear market, which is why over the long term you can grow your money by investing in stocks.
The S&P 500, which holds around 500 of the largest stocks in the U.S., has historically returned an average of around 7% annually, when you factor in reinvested dividends and adjust for inflation. That means if you invested $1,000 30 years ago, you could have around $7,600 today.
Behavioral finance theory attributes stock market bubbles to cognitive biases that lead to groupthink and herd behavior. Bubbles occur not only in real-world markets, with their inherent uncertainty and noise, but also in highly predictable experimental markets. In the laboratory, uncertainty is eliminated and calculating the expected returns should be a simple mathematical exercise, because participants are endowed with assets that are defined to have a finite lifespan and a known probability distribution of dividend
The importance of diversification
You can’t avoid bear markets as an investor. What you can avoid is the risk that comes from an undiversified portfolio.
Diversification helps protect your portfolio from inevitable market setbacks. If you throw all of your money into one company, you’re banking on success that can quickly be halted
To level out that company-specific risk, investors diversify by pooling multiple types of stocks together; balancing out the inevitable losers and eliminating the risk that one company’s contaminated beef will wipe out your entire portfolio.
But building a diversified portfolio of individual stocks takes a lot of time, patience and research. The alternative is a mutual fund, the aforementioned ETF or an index fund. These hold a basket of investments, so you’re automatically diversified. An S&P 500 index fund, for example, would aim to mirror the performance of the S&P 500 by investing in the 500 companies in that index. The good news is you can combine individual stocks and funds in a single portfolio.
Earnings per Share:
The total company profit divided by the number of stock shares outstanding.
Slang for when a company plans to have an IPO of its stock.
IPO: Short for Initial Public Offering, when a company sells its shares of stock for the first time.
Short for Market Capitalization, the amount of money you would have to pay if you bought every single share of stock in a company. To calculate market cap, multiply the number of shares by the price per share.
A share, or a single common stock, represents one unit of an investor’s ownership in a share of the profits, losses, and assets of a company. A company creates shares when it carves itself into pieces and sells them to investors in exchange for cash.
A short group of letters that represents a particular stock as listed on the stock market. For example, The Coca-Cola Company has a ticker symbol of KO, and Johnson & Johnson has a ticker symbol of JNJ.
So if you think you are ready to invest in the stock market, I suggest you get with a brokerage firm, or if you are brave enough and want to buy and trade stock yourself, TD Ameritrade is the perfect company to buy your stock. Their website is user friendly, and it's easy to understand how to buy and trade.