Mapping Out the Stock Market: Basic Concepts to Know

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The stock market is a very complex system. But you don’t need to wrench your head out just to know how it works. In fact, you only need to know these basic facts to get a grip of its workings.

 

How to Trade Stocks

When you “trade” stocks, you’re not actually exchanging two different stocks with another investor. In the financial market, when you trade, it means you buy and sell. Easy as cake.

What’s more important than knowing how to trade stocks is knowing how the stock market as a whole works. Let’s dig deeper.

Stock Price Movements

Stock prices may rise or fall depending on many different factors. Some of them are:

  • The media
  • World economic and political events
  • Earnings reports
  • Speculation
  • Risks
  • Supply and demand change

In general, stock price movements reflect the broader sentiment in the market. After all, it’s how investors feel about the stock that directly moves that stock.

Two types of Market Sentiment:

There are two main types of market sentiments:

  • Bearish sentiment – when stock prices go down and a general gloom covers the outlook of that stock or the broader market.
  • Bullish sentiment – when the market is optimistic and more investors have higher risk appetite, stock prices go up.

Bid and Ask Prices

Both the buyer and the seller have a stay with the stock’s price.

The buyer says how much he will pay for the stock. This is your bid price. Then, the seller also says his price, and this is the ask price.

Here’s where the broker and the exchange join the party. They facilitate the coordination of the bid and ask prices.

Spreads

The spread is the difference between the bid and ask prices. Of course, the broker or the specialist has to earn bucks too. That’s the spread.

Meanwhile, there are firms that can set a bid/ask spread by offering to both buy and sell a given stock. You call these firms as market makers.

And since prices move all the time, you wouldn’t know what price you’ll get unless you use market orders.

Different types of stock orders:

Trading or investing in the stock market isn’t as safe as when you use stock market orders. The most useful ones are:

  • Market order
  • Limit order
  • Stop loss order
  • Trailing stop order
  • Good till canceled
  • Day order
  • All or none

Benefits of Investing in the Stock Market

And of course, investing in stocks is popular for a reason—for many great reasons. Here are some of them:

  • When you buy a stock of a company, you also buy a part ownership of the business.
  • Since you’re a part owner of the business, you also get voting rights.
  • You may get a slice of the profit of the company in the form of dividends.
  • If the stock’s value rises, you can sell it for higher than you bought it.
  • The stock market generally outperforms other markets in the long-term.
  • Stocks have a higher rate of returns than other assets.

Overall, the stock market is a very lucrative market you would regret ignoring. There are thousands of companies that promise stellar potential earnings. Missing out on it would be a huge mistake.