The stock market can be a confusing and overwhelming place for those who are new to investing.
However, understanding the basics of stock market can help you make more informed decisions and potentially earn a higher return on your investment. In this guide, we will cover the basics of the stock market and explain some of the key concepts and terms that you should know before investing.
- What is the stock market: The stock market is a marketplace where publicly traded companies’ stocks are bought and sold. When you buy a stock, you are buying a small piece of ownership in the company. The stock market is divided into two main sections: the primary market and the secondary market. The primary market is where new securities are issued, and the secondary market is where securities are bought and sold after they have been issued.
- How does the stock market work: Companies can raise money by issuing stocks and selling them to the public. When a company goes public, it issues an initial public offering (IPO) of shares. These shares are then bought and sold on the stock market by investors. The price of a stock is determined by supply and demand. If more people want to buy a stock than sell it, the price will go up. If more people want to sell a stock than buy it, the price will go down.
- Types of stocks: There are two main types of stocks: common stock and preferred stock. Common stock represents ownership in a company, and holders of common stock are entitled to vote on company matters and receive dividends. Preferred stock typically does not have voting rights, but holders are entitled to receive dividends before common shareholders and have a higher claim on assets in the event of liquidation.
- Large-cap stocks: Large-cap stocks are stocks of large, well-established companies with a market capitalization of over $10 billion. These companies are typically considered to be less risky than small-cap stocks, as they have a proven track record of success and a larger cushion to weather market fluctuations. Examples of large cap stocks include Apple, Microsoft, and Amazon.
- Small-cap stocks: Small-cap stocks are stocks of smaller, less established companies with a market capitalization of less than $2 billion. These companies tend to be riskier than large-cap stocks, as they are less established and have a smaller cushion to weather market fluctuations. However, they also have the potential for higher returns.
- Indices: An index is a group of stocks that are chosen to represent a specific market or sector. The most famous index is the S&P 500, which represents the 500 largest publicly traded companies in the United States. Other popular indexes include the Dow Jones Industrial Average, the NASDAQ Composite, and the Russell 2000.
In conclusion, understanding the basics of the stock market can help you make more informed decisions and potentially earn a higher return on your investment. Remember that the stock market can be a risky place, and it’s important to have a clear investment plan and diversify your portfolio to reduce risk. Large-cap stocks are stocks of large, well-established companies and are considered less risky than small-cap stocks, but small-cap stocks also have the potential for higher returns. It’s always a good idea to consult a financial advisor before making any investment decisions.