Basics of Stock Market

1. Introduction to Stock Market

The stock market is a vital part of how our economy functions. It acts as a marketplace
where companies can offer a small fraction of ownership in return for cash, and investors
or traders can exchange those owned shares of the companies between themselves. The
industry in total has over 2.3 billion shares that exchange hands on the stock market every
day. Nearly anyone who has a retirement fund has part or all of their investment in the
stock market. Companies hope that this ownership piece will grow in value and yield a
financial benefit to the investor or trader. The general use of this is dependent on the
value of the company. Consequently, activities or transactions taking place in the stock
market could affect the market valuation of companies. (Crosthwaite et al., 2022)

The stock market, including all of its component parts, has a long history that goes back
more than 200 years. This part of the financial market, where assets like stocks, bonds,
options, and mutual funds are traded, began in coffee houses in several European
countries during the 1500s. The Amsterdam Stock Exchange was the world's first stock
exchange when it opened in 1602(Karan et al.2024). This was the backdrop in which
stock exchanges blossomed all over the world, and some of the famous exchanges
include the New York Stock Exchange, the London Stock Exchange, and the Tokyo
Stock Exchange (Macaulay, 2024). These stock exchanges are large markets where
companies come to raise money by offering their shares and where the normal investor,
such as ourselves, buys and sells stocks owned by us(Smith-Ruiu2024). As a stock trader,
a fundamental understanding of how this stock market structure operates is crucial. This
knowledge will allow you to assess a stock investment opportunity and make informed
judgments concerning a company's financial standing. (D’Alvia2023)

2. Why Invest in the Stock Market

Why Invest in the Stock Market?

In the world of investment, stock markets are one of the most attractive short-,
intermediate-, and long-term saving options. The thought of owning a part of businesses
and contributing to their progress, showing striking growth over the years, is nothing
short of exciting, attractive, and satisfying. This potential to grow and create wealth for
real investors is one of the main reasons people invest in stocks. There are many
advantages that stock markets have over other investments. Over time, when you invest
in the long term, the market leaves other investment fields behind, such as real estate or
gold, to create wealth. Investors cannot afford to overlook the participation of stock
markets in their portfolio creation. Legal results have revealed that for stock markets, the
mistake of the least investment in stocks has not been made until now. (Goldstein, 2023)

Higher Potential Returns While it is absolutely true that stock returns over 20 years or
more are more predictable than any other type of investment, the stock market is much
more favorable than other investment alternatives such as corporate and government
bonds. The higher potential is because when you buy ownership interests in a company,
you buy a minor portion of the business. Older investors have regarded the addition of
stocks to their savings as a way to achieve growth in assets. While facing historical
international inflation, the price of stocks has surpassed the growth of all others after
deducting inflation, such as real estate, bonds, and other types of significant assets. The
absence of inflation has really reduced the ability of other investment alternatives to
support it. For those long-term investors reflecting the largest return on investment, the
stock market is the key to purchasing power. Diversifying with stocks in different
industries, building sizes, and nations is a cornerstone of portfolio creation. What is very
important for stock market awareness is to make intelligent planning decisions. Those
who are good at contributing to a diversified portfolio of stocks often have favorable
conditions. Duplicating a range of investments and diversifying a stock portfolio is
critical. Diversification is essential in portfolio planning.

Fear of Missing Out Alternatively, one of the key advantages of the stock market is not
needing to miss quality of life due to huge inflation rates that banks achieve. What can be
bought in the future 35 years from now, exposed to inflation, if £100 could now buy
luggage? However, be sure that you have enough savings to manage your finances and
achieve financial independence during your later years! With increasing wages of 6
percent a year, it will take over 14 years to amount to £50,000 for the current purchasing
power of £50,000. The dangers of stock investing and the income fluctuations associated
with stock investments should be clear. Not everybody will view the stock market as an
intelligent asset category in their portfolios. Nevertheless, investments have no place for
traders who are not willing to face the challenges that risk may entail. Returning to
planning and investment is one of the laws and regulations for creating a wise and long-
term investment strategy. Starting regularly can help you stay on track, finish right, and
achieve the pleasure you have been waiting for when you retire. Although the large stock
market trader just scores to indicate new milestones, speculative investors have
outstanding long-term indicators, including obtaining better equity.

3. Key Terminologies in Stock Market

The stock market is often seen as a complex world where whimsical terms, jargon, and
redundant regulations govern the movement of the major players—the listed entities and
investment bankers. The subsequent chaos is recompensed by allowing the newbie
investor to have a bird's eye view of the market. This section introduces the key
terminologies that are seen as fundamental to understanding the stock market.

Firstly, stocks, or shares of a company, are also called equities. If you own a company’s
stock, then you are a part owner, or shareholder, of the company. This means you, in turn,
claim your percentage share of the profit of the company, called ‘dividends,’ which are
usually paid out. In the event the company doesn’t perform well, you may not receive
dividends. The ‘price’ of the stock fluctuates based on market demand, the financial
outlook of the company, and the recent news of the company. The company does not pay
any fee for your stocks. Alternatively, companies fall under a category of shares called
fractional shares, which again are sold to the public by the stock market. Share price
multiplied by the number of shares is called the ‘market capitalization’ of the company,
with substantial implications. For small investors, buying stocks can be a bit challenging,
with ‘volatility’ being the most common misstep made due to impatience. This word is
responsible for the rise and fall in stocks.

In India, ‘BSE’ and ‘NSE’ are the two prominent stock exchanges. A share price report is
given in the ‘share bazaar’ or stock market at these stock exchanges. When trading opens
during the day at stock exchanges, investors can buy or sell billions of stocks. You get the
‘closing stock price’ for the day on the business news at the end of the trading day.
Stocks can be easily converted to cash, and vice versa. An ‘order’ is a request to buy or
sell a stock. A ‘market order’ is an order to buy or sell the stock at the best possible price
available. This is because stock prices are always moving. A ‘limit order,’ on the other
hand, is not an order to buy or sell at the best available price, but at a set, specific price.
An ‘index’ helps to evaluate changes in the stock market over time. It denotes the
performance of the market sector or the whole stock market. In India, a prominent index
that most people hear about is the BSE SENSEX. The SENSEX is a market
capitalization-weighted index, following 30 of the largest and most actively traded
stocks. It represents a wide variety of industries, which, when considered together, are
speculatively slated to represent a sense of the economy.

4. Types of Stocks
Stocks are generally divided into two categories: common and preferred. Let's learn about
them.

• Common Stocks These are the stocks that most people invest in. They represent
ownership in a company. The common stockholders have voting rights for the election of
a company's board of directors or on several issues. As they possess the most control,
they also have the best opportunity to increase their profits. When a company has done
well, the value of the common stock increases, and the buyers can then sell theirs for a
profit. They represent the riskiest types of securities.

The company distributes a portion of its after-tax profit as dividends, and common
stockholders can receive returns in two ways: in dividends, when the company does well,
and by selling the shares of the business at a profit. However, common stockholders are
the last priority to be paid with investors, and all other stakeholders receive returns. This
means they only receive a dividend if some profits are remaining after all costs and other
investor profits have been paid. The chance of being paid a dividend, in this case, is
based on how well the company is doing. They may also lose their investment and
receive little or no value for their shares. Dividends printed directly from a typical stock
also fluctuate regularly and are not guaranteed. The share's worth can decline in price as
well as rise primarily in response to the success of the institution. The more online
merchants buy and offer a stock, the higher the stock price volatility. It provides investors
with the potential to earn profit, but also generates risk for losses. The riskier of the two
types of inventory is preference stock and typical stock.

4.1. Common Stocks

Introduction Common stocks represent a kind of equity or ownership investment that
entails purchasing a vested interest in a company and, thereby, having certain ownership
rights. Investment Features Common stocks offer the greatest potential for growth and
are generally viewed to be riskier investments than preferred stocks. Most common
shareholders may potentially benefit most from their stock ownership via a return in the
form of dividends that may be paid periodically by the company. Furthermore, a common
stock owner can make a profit when they decide to sell their stock if the market price of
the stock has increased since the date that the stock was purchased, also known as capital
gain. These gains can be unlocked either when shares are sold or when ownership is
transferred through inheritance. Investment Risks Purchasing common stocks does pose
risk. If the company does not do well, the stock will lose projected value and the investor
will lose some or all of the invested money. Common stock prices may fluctuate
significantly over short periods of time due to factors affecting individual companies,
industries, or the overall market. These price fluctuations can be due to changes in
expectations about the company's earnings or new developments that might change the
way the market assesses the value of the company in other ways. Owning Share of Stock
A common shareholder is entitled to the profits that are left once all debtholders,
creditors, employees, and preferred shareholders have been paid. However, since
common shareholders are the last in line, their profits are not a sure thing. Before
purchasing common stock, an investor may want to do some research on the company.

4.2. Preferred Stocks

The dividends on these stocks are represented by a fixed percentage of the share’s par
value. While there is no maturity date associated with preferred stocks, the company may
redeem the shares, usually at its par value, whenever it chooses. Owners of preferred
stock have priority in the payment of dividends and the return of their investment over
the holders of common stocks. If the company is liquidated, any remaining assets
typically will be divided proportionately according to the number of preferred and
common shares outstanding. Occasionally, preferred stocks may be cumulative and have
the potential for increasing dividends if the company’s income exceeds predetermined
levels. This results in the payment of dividends from prior years owing if, at a later date,
the company does not pay the dividend amount missed in a previous period.

While the dividend return may be preferential, preferred stockholders typically do not
have any voting rights. In this regard, preferred shareholders resemble the more than 23
million Americans who own savings or investment certificates. Yet, these investors hold
a unique security that, in the event of cash flow constraints, can convert directly into
common stock, based on a predetermined conversion price. As a result, the preferred
stock market, often called the hybrid market, has flourished in recent years. In terms of
taxation, some preferred stock dividends are not fully tax-deductible by the corporation,
but the partial deduction typically results in higher dividends for the shareholder. The
investment environment determines the ideal ratio of preferred to common stock and debt
for a company and, in turn, the optimal type and pricing of preferred stock. Preferred and
common stock are both equity investment vehicles; however, the features of preferred
stock are more reflective of fixed-income securities (Fisch, 2021). The predictable
income and relatively modest price volatility that preferred stocks carry on one hand, and
a complete absence of a clear claim to dividends, control, or assets, as is the case with
common stock, offer value to specific shareholders. Unique characteristics of preferred
stocks: In general, preferred stocks are, in many ways, similar to bonds. There is no
maturity date in the majority of cases; however, the company usually has the option to
redeem the stock from the investor at predetermined time intervals. The stock’s dividend
is a set percentage of the par value that the shareholder initially pays. If the shares are not
redeemable by the company, the dividend payments are perpetual. Most preferred stocks
are cumulative, meaning that unpaid dividends accumulate for future payment. However,
with the current popularity of hybrid debts and preferred stocks, less than 33% of
outstanding preferreds are cumulative. While the features of preferred stock can be
complex, it is evident that this form has its own unique niche in the securities industry.
Moderate growth common stock holders, particularly in retirement, turn to preferred
stocks when they want dividend income in a way less volatile than that for common
stocks. (Belot et al., 2024)

5. How to Buy and Sell Stocks

Investors can choose from a range of methods to buy and sell stocks. A full-service
brokerage account allows investors to employ the services and advice of a professional
stockbroker, whereas discount brokerage accounts can be used to execute trades through
an online trading platform. Regardless of the method investors choose, it is important to
select a reputable brokerage. Before opening a brokerage account, investors should
compare the account options, features, products, and services that different brokers offer.
Investors should also ensure that their stockbroker or investment professional is correctly
licensed to trade stocks (Damodaran, 2024). Investors must complete a trading
authorization form to grant permission for their representative to carry out trades. Once
an account is set up, investors should be prepared to make or close stock orders. This
typically involves contacting the broker by phone, but it can also be done online using a
trading platform. There are different types of stock orders, including market orders,
which are executed at the current stock price, and limit orders, which are performed only
at the specified price or better. Any trade will be subject to trading fees and commissions,
which can vary between different brokers and account types. Any purchase, deposit, or
transfer may also entail costs and taxes. Before placing an order, investors should also
think about the factors affecting their decision, such as current market conditions, trends,
and stock prices. Additionally, they should make sure that they have a good
understanding of their overall investment goals, risk tolerance, and liquidity needs.
(Akepanidtaworn et al.2023)
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