The Crash Course for Every Beginner Investor: Basic Stock Concepts You Need to Know

If this is the first time you’re stepping into investments, you’re probably aware that you’ve got a lot of ground to cover, especially in stock investments. It’s a whirlwind of information and concepts, so we understand why it can be immensely confusing. Hence, here’s a list of basic stock concepts that you need to know!

What is a stock?

A stock is also known as a share, or equity. It is a financial instrument that symbolizes the company’s ownership. For investors, buying stocks increases their wealth. This is because they will be subjected to a proportionate claim of assets and earnings from the company.

If you invest in stocks, you will be the company’s shareholder . That means you have a certain ownership of the company which makes you eligible for some of the profit. Shareholders also have voting rights and can participate in the company decision-making.

What is a stockbroker?

A stockbroker is an individual or organization that executes buy and sell orders for stocks and other securities on behalf of clients. Sometimes, investors refer stockbrokers as investment advisers. Some of these advisers merely provides trading advice for their clients and nothing else.

But for most stockbroker organizations, they make the trades on your behalf. 

How does the stock market work?

New York Stock Exchange (Image taken from CNN)

The stock market is a public trading venue for investors to buy, sell and issues stock on an exchange, or via over-the-counter (OTC) trading. Resembling an auction house, the stock market allows buyers and sellers to negotiate prices and make trades.

But what is the exact process? First, the companies will list shares of the stock through an Initial Public Offering (IPO), and interested investors will buy the stocks. This trade allows the company to raise money to grow its business. Investors can then buy and sell these stocks among themselves. The exchange tracks the supply and demand of all the listed stocks, which determines the company’s value.

One of the most popular stock market is Wall Street’s New York Stock Exchange and the National Association of Securities Dealers Automated Quotation System (Nasdaq). However, with the dawn of the Internet, the stock market can also take place electronically, through the internet and online stockbrokers.

What is an IPO?

As mentioned previously, IPO stands for Initial Public Offering. An IPO is the very first time a private company issues stock to the public. Companies who go through the IPO process have two objectives; to raise cash so that they can further grow and expand their small businesses, or to allow employees, owners or early investors to liquidate some of their shares and make money.

Common vs preferred stock

The biggest difference between common and preferred stock is that shareholders of common stocks have voting rights while preferred shareholders don’t.

When people talk about stocks, they usually mean common stocks since most stocks are issued in this form. Common shareholders are allowed to vote at shareholder meetings and are entitled to a percentage of the companies profit – the dividends. Common stocks is a type of stock that provides the biggest potential for long-term gains. If a company does well, the value of a common stock goes up. But if the company does poorly, the stock’s value will decline.

Preferred stock functions similarly to bonds in a sense that investors are usually guaranteed a fixed dividend in advance. Preferred shareholders will receive their share first before common shareholders. In exchange for this preferential treatment, the preferred shareholders generally won’t receive more than the stated dividend. That means, no matter how successful the company is, the preferred shareholders will only receive the agreed percentage.

Growth stock vs value stock

As you begin your investment journey, you also need to know where your risk tolerance is. If you’re young, perhaps you’re more open to taking a risky yet rewarding path? Or maybe you’re slightly on the older side and prefer a safer route? Now this is where growth stock and value stock comes in. 

Growth stock refers to shares in a company that is expected to grow above the market’s average rate. Growth stock does not provide any dividends to the shareholders. This is because companies usually want to reinvest any earnings in order to accelerate growth in the short term.

The only time an investor can earn money on their investment is when the companies eventually sell their shares. If the company fails to expand, investors will suffer from the losses. Because of this, growth stocks are incredibly risky but they are also the stocks with the greatest potential.

Value stock is considered to be much more stable. These companies offer steady growth prospects and focus on providing shareholders with generous dividends. 

What is market cap?

Market cap, or market capitalization, measures how big the company is.

It is the total value of a company, the sum of the total shares multiplied by price. Market cap allows you to evaluate the company’s overall performance within the same sector or industry. For instance, if you’re interested in stocks within the technology industry, you would want to know that Apple’s value is $1 trillion while Samsung is $200,000 billion.

Thus, always evaluate the company’s market cap to estimate it’s true value.

Below is the categorization of market cap:

  • Nano-cap stock are companies with a market cap between $0M to $50M
  • Micro-cap stock are companies with a market cap between $50M to $300M
  • Small-cap stock are companies with a market cap between $300M to $2B
  • Mid-cap stock are companies with a market cap between $2B to $10B
  • Large-cap stock are companies with a market cap between $10B to $300B
  • Mega-cap stock are companies with a market cap of $300B and above

Bull market vs bear market

Image taken from Bloomberg

A bull market or a bear market refers to the overall situation of the economy. 

If it’s going well and the prices are rising, it is called a bull market. It is a phrase used to describe a positive economic environment since a bull market is often linked to low unemployment and the likes. In addition, “bullish” is used to describe your outlook of the economic situation. If you’re “bullish” about the market, you think it’s headed upwards.

The bear market is the opposite. A bear market refers to an economic state that is declining – market prices are falling and more people are losing their jobs. This is when the people’s confidence in the economy is extremely low, and more people are selling stock than buying. So, if you think the stock market is “bearish”, you believe the economy is heading downwards. 

Why does stock prices fluctuate?

Stock prices fluctuate based on many factors including supply and demand. If more people want to buy a stock (demand) than sell it (supply), then the price moves up. Conversely, if more people wanted to sell a stock than buy it (aka greater supply than demand), the price falls.

The media is yet another major factor. Let’s say, a certain company was in the news because of something negative. This affects their overall brand name which results in losing clients. Hence the stock prices for that company decreases.

However, no one really knows why stock prices fluctuate so much. The stock market is incredibly difficult to predict due to the fact that we can never foresee any triggering events nor can we predict the human decision process.

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