I am extremely passionate about the stock market. I try my best to provide high-quality information and resources that help you understand, learn, and develop the stock market trading and investing skills in order to make your trading and investment easier. In this post, I will discuss the stock market fundamentals for the people who are at the beginning level.
Note: Do not just jump from one article to another; try to read them properly.
Stock Market Basics for Beginners
The stock market trading and investment is not an easy way to make money. Some people think it is an extremely easy path to make a lot of money and be rich within a short period of time. But it is totally a wrong idea. Many people lost everything in the stock market. I also lost a huge amount of money in a crashed stock market as I knew very little when I made an entry to the stock market. However, if a person knows how to create an optimal portfolio he/she can make the profit taking a very low risk.
Few Words on Stock Exchange History
The idea of debt dates back to the ancient world, as evidenced for example by ancient Mesopotamian clay tablets recording interest-bearing loans. There is a little evidence about when the corporate stock was traded first. Some people think that this was started at the time of East India Company that was founded in the year 1602. Others think that it is an early development. The well-known economist Ulrike Malmendier of the University of California claims that a stock market existed in the ancient Rome.
What is stock or share?
A stock is a small piece of ownership of a company or a small business. It does not matter if it is listed to a stock exchange or not, when you have one stock of a small business, you have a piece of ownership in it. When you have an ownership in any company, you basically have a claim on the asset and the earning of the company. So, you can be benefited by the dividend or the price appreciation [price gain].
For example, a company ABC is worth of 25 million dollars, and it has 5 million stocks outstanding as well. When you own one stock of this company, you have a claim on its 5 dollar worth of the asset. You also have a claim on its earning as well. If within a year[or within a financial period], the company earns 5 million dollars, you have a claim of one dollar on its total earning since you are holding one piece of ownership.
The benefit of buying a stock by a person and selling by the company is that the buyers can utilize their ideal money and the company can collect money for its further expansion. So, it facilitates the market liquidity. Now, as a beginner you know the meaning of a stock. We will now go to the basic definition of a stock market.
What is a Stock Market?
A stock market is a place [physical or virtual] where the trades take place. The stock market makes the stocks of the company available to the public so that the stocks can be traded among traders.
The market facilitates the buying and selling of stocks in the market. When you will go to the NASDAQ or NSE or any other stock exchanges, you will see that the buying and selling of stocks are taking place.
It is a place where public determines a company’s share price by their opinions. Based on the available information, they bid the price while making a trade. The traded price is basically the output of the traders’ personal opinions.
The stock market, also, provides liquidity or works as the source of capital of the companies.
How the price change occurs in the stock market?
A company’s share price is actually dependent on the ability to make future earnings. While trading, an individual determine the price based on the available information he\she possesses. If the price is less than or close to the stock price in the market, then he\she executes the trade [that is the rationale]. Different individual has different types of ability to get the right information. Also, different people use different types of price analysis. So, the evaluation may vary person to person.
For example, one person thinks the stock price of company ABC should be 10 dollars per share while others may think it should be 12 dollars. They really argue about the price. The trade will be executed on the most supported price. So, the job of a trader or investor is to argue about the price and determine one.
Why Stock Prices Change?
As I said earlier, the price is dependent on the information available to the traders or investors [efficient market]. The price is dependent on the potentiality of the future earning of the company. If the current value is less than the potential value, then the trader executes the trade. If current price is more than the actual value, it is over price. Trader does not execute the trade in this case. When the most updated information is become available in the market, the stock price adjusted to the fair price.
The information frequently comes to the market and price changes frequently. When your analysis is correct you get profit.
The stock price is dependent on few factors.
Past information is irrelevant in the market. It does not have a real value to analyze the future price [except for few cases].
The Efficient Market Hypothesis – A Theory of Stock Market
The EMH states that
- We cannot beat the market
- The traded price is always the fair price
- Therefore, It is impossible to find an undervalued stock
What types of Analysis are needed to learn?
Fundamental Analysis – FA takes company information, industry information, and macroeconomic information into account to find out the true value of a stock. If the price is greater than the current price, a trade executes a buy order.
Technical Analysis – TA is the analysis of stock price movement. It believes that the history repeats itself. It takes the historical price into account and predicts the future price.
Learning how to trade and invest in the stock market is not a very difficult job but it is a time-consuming process and you need to learn the proper way and practice a lot before starting the real trade. I have learned this lesson after losing a big portion of my first investment. I do not want anyone else to make entry to stock market without prior knowledge of trading and investment. So, if you have already decided to trade and invest in the stock market, start by learning the Stock Market Terminology for Beginners.
Related Reading:
- How to Invest in Dhaka Stock Exchange
- Small Business Ideas in India
- How Many Types of Preferred Stocks are there?
- Features of Preferred Stocks
- Features of Common Stocks
Sheikh Faizul Haque is an internet entrepreneur and the founder of The Strategy Watch; Graduated from North South University with a double major in Accounting & Finance in Bangladesh.
With a strong interest in developing and improving Business Strategy and to Conduct Business Analysis.