Basics Of Stock Market For Dummies

The stock market is an umbrella term that refers to the business of trading bonds and stocks within a legitimate entity known as an exchange. In the United States, there are 3 major stock exchanges: the ‘New York Stock Exchange’, the ‘NASDAQ’, and what is known as the over-the-counter exchange. Each of these entities implements its own listing requirements. The New York Stock Exchange implements stringent requirements for listed stocks, which also makes the stocks highly visible. This in turn makes NYSE an ideal exchange for stocks to be listed in.

Basics Of Stock Market for Dummies

1. Buying in

Each time an investor purchases stock from a particular company, they are actually purchasing the business itself, or at least a part of it. Should the company perform well in the market, the investor will have a share of the profits. Should the company suffer from a decline, the market value of the stock will also decline.

2. Risks to consider

Unlike other types of investments, stocks are not covered by some type of insurance usually offered for money deposited in banks. The key to reducing any kind of risk he’s willing to shoulder. A time-honored practice recommends that potential investors should avoid using money they would need for the next 3 to 5 years to purchase stocks. If the market goes south, they could suffer losses they cannot afford.

3. Purchasing stocks

Once an investor determines the kind of risks he is willing to shoulder and which company’s stocks he would like to purchase, he can then ask a broker to purchase the shares on his behalf. The broker’s job is to look for dealers and find stocks at the best prices.

4. Pricing stocks

The price of stocks fluctuates throughout the day. Their value depends on the number of people who want to buy them. This is referred to as the demand. Supply, on the other hand, refers to how many shares are being made available for investors to purchase. The play between ‘supply and demand’ determines the prices of the stocks. If there is a high demand, the price of that stock will rise.

5. Selling stocks

There are many reasons why people opt to sell stocks. An investor may wish to convert it to cash, for example, or want to take advantage of high prices by selling his shares.

6. Time and stocks

When it comes to investing, time is an ally. Since markets fluctuate, an investor will have better chances of gaining from his investments the longer he spends trading. Additionally, he can also benefit from compound growth, the term used to refer to the practice of reinvesting stock earnings into the investment.

7. Diversifying

Another important thing to remember about investing in stocks is to diversify. By diversifying, an investor spreads the risk by distributing the money into several different investments. This offers lower risk than putting all that money in just a single stock. It may be tempting to buy into just one stock, particularly if one company is emerging as a hot find but there is that potential risk of losing everything should that company fail. Spreading the investment helps minimize the risk.

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