Introduction to the stock market

Baby Bull

iOS app that provides an investment journal platform

whilst teaching investors how to use it


FTSE 100 hits new record high and Dow Jones smashes 21,000”. The stock market is clearly an area that many of us want to get into, but don’t know how. The market is complex, information is scattered and risk is high. Within these guides, we aim to break down the stock market into bite-size understandable bits to transform you from a speculator to an investor.

The stock market will only become increasingly significant whilst society develops, as companies need to fund their projects, and the two main options are through equity funding (offering shares) and debt funding (borrowing from a bank).

Think of a product you like or know or heard of lately. Chances are that the company may be publicly listed.

Publicly listed companies allow everyone to buy and sell shares in that company.

For five days a week (from Monday to Friday), stocks around the world trade on stock exchanges. Together, they make the global stock market. Some stock exchanges are more important than others. It depends on the number of companies that list their shares and how big these companies are. Also, trading activity matters too, in the sense that the most active exchanges attract more companies and increase liquidity.

Stock Exchanges

The place where most trading happens in the U.S is the New York Stock Exchange (NYSE). Effectively, the NYSE trading activity surrounds three stock market indexes: The Dow Jones Industrial Average (DJIA), Nasdaq and S&P 500. The first one is the most popular. If you watch the daily news or read a newspaper, chances are you’ve heard of the DJIA. This index takes the thirty biggest companies in the United States and weighs them, meaning an increase in the price of a company with a market capitalization of 5bn will have a bigger effect than the same increase in a 1bn company. These companies are commonly known as blue chips companies, they are huge multinational corporations with businesses in some hundred-plus countries. Therefore, when the DJIA suffers a significant correction, the repercussions are to be felt around the world, not only in the United States.

Some stock exchanges are more important than others. Source: shutterstock.com

Nasdaq, on the other hand, is the preferred stock index where technology companies list their shares. Leaps in technology changed the world we live in today drastically when compared with the previous century and will keep changing the world for future generations too. Interestingly, Nasdaq also lists part of companies that aren’t in the United States. The S&P 500 tracks five hundred companies in the United States, and it is a benchmark of the overall state of the economy. Similar indexes exist around the world, with virtually every country listing the most important companies.

Do you own part of the company?

The most common misconception that people have is that when you buy stocks in a company, you own part of the company. But when you buy stocks you are essentially buying shares from the company, not the company itself or its assets, e.g a shareholder owning 50% of the company cannot walk out with the company car because the company owns it, not the shareholder.

However, when purchasing shares, you earn the right to vote, voting affects control of the board of directors, you also might receive a portion of the company’s profits known as dividends, which are usually given out on fixed dates, although a lot of companies don’t pay dividends as they reinvest their profits instead. You can also sell your stocks on the market.

Common vs. Preferred stocks

There are two main types of stocks – common stocks and preferred stocks.

Stocks type

Common stocks

Preferred stocks

Pros Has voting rights;

Highest chance for gains (Capital gain); Usually an increase in dividend payments if the company does well.

Usually comes with a fixed divided;

If the company goes bankrupt, preferred stockholders are paid off first.

Cons Bearing more risk, volatile market;

If the company goes bankrupt, common shareholders are paid last.

More or less stagnant divided rate, even if the company performs well;

Usually does not come with voting rights.

The more significant your holding is, the bigger the percentage/position you take in that respective company. As such, you participate in that company’s success and failures. You’re responsible for its future (as a stockholder you can join in shareholders meetings and vote on plans) and the business direction. Typically, investors buy and hold stocks to make a profit. Investors want to buy low and sell high, and the time horizon depends on the trading strategy.

Market Complexities

Day traders speculate on the daily fluctuations in the stock market. They buy and sell a company’s shares only to make a profit during the trading day. This type of investing has a short time horizon (period of time you hold a stock).

A stock can rise or fall, and it may or may not have a dividend (money paid to stockholders per basis). There are many reasons to buy a company’s stock. From a company’s perspective, it lists either common or preferred stocks. Everything discussed so far refers to common shares. Preferred stocks are a bit more complicated, in the sense that combines traditional stocks with the benefits of a bond. What’s important to know here is that preferred shares usually pay a dividend. Companies list shares to be able to fund future projects. But the process of listing the shares on a stock exchange is complicated. Before doing that, the company wants to know the interest in its shares. Is anyone interested in buying its shares? If yes, how many and at what price?

An Initial Public Offering (IPO) is the first step when the company sells its shares for the first time. Usually, a company raises capital to expand, and thus investors offer cash in the hope of future returns.

What Moves the Stock Market?

Any financial product, stocks included, move based on supply and demand imbalances. When buyers dominate in number and volume, the stock price of a company rises. Or, it goes down when sellers outpace buyers.

During the trading day/week/year, some stocks perform better than others. Internal factors matter for individual stocks, but the general stock market movements depend on external factors too. A country’s monetary policy, for instance, is an influencer. Investors and investment vehicles park their money in various assets around the world in search of the highest yield possible. From stocks to bonds, commodities or currencies, they tap each financial market’s corner. Conditions, however, may differ. In the United States, the interest rate may be higher than other parts of the world, favoring some financial sectors. As a rule of thumb, loose monetary policies favor stock purchasing, with investors fleeing the stock market when central banks reverse course. Wars and geopolitics influence the stock market too. Sentiment shifts change perceptions, and the stock market is the first place it becomes evident.

Conclusion

The stock market is the place where companies and investors meet for the same purpose. Investors want to participate in a company’s business activities, so they buy its shares. The goal is to profit from the company’s success. Companies list their shares to fund future projects or to expand into different markets. In their search of funding, organizations list shares for interested investors. The idea is to grow and expand the business, hence to make more profits. As such, both companies and potential investors ultimately have the same goal. So, why would anyone be interested in the stock market? The answer is simple: to maximize shareholders’ wealth.

The stock market is the place where companies and investors meet for the same purpose. Source: shutterstock.com


Baby Bull is the first and only iOS app that provides an investment journal platform whilst teaching investors how and why they should use an investment journal.

We are two budding 19-year-old entrepreneurs (Truman Tong and Rhyme Luk), using our own money earned from internships and pocket money to create an app, that will capitalize on a market of over 27 billion downloads within the finance and education.

We have created a tailored investment journal layout to make it easy to store all the notes you have in a safe place. Not only will journalizing your investments help improve your diagnostic analysis, but it’s also a great way to show prospective employers your thoughts and processes when investing to highlight your knowledge during interviews.
Install soon on the App Store to become better, faster for free!

Find us on our social media platforms: Facebook, Instagram, Twitter, Linkedin at @babybullapp


SEE ALSO: The most prominent IPOs of 2018

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