Stocks are traded on what is known as a “stock market,” but the term really refers to an index such as the Dow Jones Industrial Average or the S&P 500. While each of these indexes references different methodologies for selecting which stocks to include, they are both designed to function as proxies of the overall trends of the market. The DJIA includes 30 blue-chip stocks, and include some of the most well-known companies across a variety of sectors, not just industrial. Following its name, the S&P tracks 500 stocks that are selected by a committee.
How the stock market works
The stock market is where exchanges occur. Companies list shares on an exchange like the New York Stock Exchange or the Nasdaq. The first time a company begins to sell stocks it’s known as an initial public offering (IPO). After that, investors begin to buy and sell stock, as well as use different financial instruments as a way to profit on the stock market.
What are the stock market hours?
Stock market hours are different from country to country. The regular trading hours on the New York and Toronto stock exchanges are Monday through Friday, 9:30 a.m. to 4:00 p.m. The London Stock Exchange, meanwhile, is from 8:00 a.m. to 4:40 p.m.
What is a share?
A stock, share, or equity all mean the same thing: that you own a portion of a company. It used to be that investors could only buy into companies by purchasing full shares; however, with the advent of fractional investing, people can now own a piece of the companies they believe in for a portion of the price of a full share. Public, for example, offers the ability to purchase many stocks in “slices,” which make higher-cost stocks more accessible to the everyday investor.
How is the price of a stock determined?
Some factors that investors use to determine a stock’s price include revenue growth, historical price, earnings per share, the amount a stock earns for every dollar spent on the stock (known as the price/earnings ratio), and dividends, which are a portion of the company’s profits paid to stockholders on a quarterly basis.
How does stock picking work?
Investors will offer a “bid,” which is the highest asking price they consider acceptable for a stock. Typically, the bid is less than what the sellers “ask” for. The difference between these two figures is known as the bid-ask spread. For the trade to successfully occur, either the buyer needs to increase what they’re willing to pay or the seller needs to decrease what they’re willing to accept.
It requires a lot of research to know what stocks are worth bidding on and what amount to bid. To make an informed decision, investors will learn as much about a company as possible. They will study the sector, read press releases, consume earning calls, which are quarterly discussions on a company’s financial performance, and much more. Investors want to make a good decision in part because the stock market may be good for long term investment given its historic upward trend, but in the short term, the stock market can be volatile.
Benefits of being listed on the stock exchange
There are several reasons why a company would want to be listed within a popular stock exchange. Being on an exchange means that shares have ready liquidity, which means that they can be quickly turned into cash. Being on an exchange makes it easier to get more money for the company, as well as attract talent, because stock options are a great way to entice potential workers.
Being on a popular exchange can also have PR benefits and increase discoverability among retail investors. The attention in and of itself from analysts and institutional investors may positively impact a share’s price. Listed shares can also be used to make acquisitions because stocks present a suitable, and at times preferable, alternative to cash.
Problems of a stock exchange listing
There are, however, downsides to being on a stock exchange, such as the time and resources that must be devoted to proper compliance. Regulations that affect being publicly traded may affect business. Many investors are focused on short-term gains, which may also adversely affect a company’s long term goals.
These days, it’s not uncommon for large companies such as Uber and Airbnb to delay going public to avoid these downsides. However, there’s also the fact that large companies like these are able to attract investors through other means like venture capital and private equity. The number of publicly-traded companies in the U.S. has shrunk from 8,090 in 1996 to 4,336 in 2017, according to World Bank data.
What are stock market indexes?
An index is a portion of the stock market. The S&P 500 and the Dow Jones Industrial Average are two popular indexes. One way to invest in the stock market is by purchasing funds that reflect the performance of these indexes. This is done through a mutual fund known as an index fund or in the form of an exchange-traded fund. The advantage of such financial instruments is that you purchase multiple stocks at once through a single transaction, achieving diversification with great ease.
What are the largest stock exchanges?
The largest stock exchanges in the world are the New York Stock Exchange (NYSE), the NASDAQ, and the Tokyo Stock Exchange. Other large exchanges include China’s Shanghai Stock Exchange, the Hong Kong Stock Exchange, Euronext, and the London Stock Exchange.
What are some common stock market terms?
Once you start reading about the stock market you’ll notice the same vocabulary being used over and over again. While the jargon can feel unfamiliar and daunting at first, once you understand what they mean you’ll be on your way to becoming a more well-informed investor.
A bull market is when the market is doing well and growing at a steady pace. In a bull market, investor sentiment is optimistic and stock prices rise significantly following a previous decline. Bull markets can last several months or even span into years.
The opposite of a bull market is a bear market, defined as a point in time in which the market is seeing challenges and investor sentiment is on the decline. Just like bull markets, bear markets can span weeks, months, or years.
A mutual fund is a financial instrument that allows you to purchase a portfolio of stocks that mirrors the stocks in a particular index, such as the S&P 500 and the Dow Jones Industrial Average. Your mutual fund does as well as its corresponding index.
Dividends are portions of a company’s profits that are awarded to shareholders on a quarterly basis. Not all companies offer dividends and not all dividends are distributed equally.
Short-selling entails borrowing stock from someone who owns it, selling it with the hope that the price will go down, then buying it back for less money than it was sold for. The difference in price is the profit the short-seller keeps.
How do you invest in the stock market?
Traditionally, many people have invested in the stock market via company-sponsored 401(k) retirement accounts. These accounts often invest in mutual funds, which are often made up of stocks. Other investors use brokers, which exist as middlemen between investors and the stock exchange. Brokers can range from high-touch, brick-and-mortar agents to frictionless digital assistants designed to simply facilitate trades with little to no financial guidance included.
Technology has ushered great democratization when it comes to investing in the public markets. Digital brokerages made it possible for retail investors to make their own trades for a small commission-free, granting more people to get into the market without necessarily needing a formal money manager. The advent of no-commission investing, now commonplace, and user-friendly mobile apps, like Public, are further democratizing the stock market.
Investing in the stock market might seem daunting to a new investor, but keep in mind that the public markets exist to get the public involved in a company’s business. As you educate yourself on the fundamentals and orient yourself in the common terminology, you will begin to feel more comfortable wading into the waters of investment. What’s more, these days technology has made it easier than ever for everyday investors to own a piece of the companies they believe in at an accessible (and oftentimes, free) price point.