General Information about the Stock Market.
Below you will find information regarding the Stock Market that any investor/trader should know before he/she starts trading/investing their hard earned money.
What is The Stock Market?
The Stock Market is made up of stocks that are listed on the Stock Exchange. The stocks/shares represent ownership of individual companies.
What is The Stock Exchange?
The buying and selling of the above mentioned stocks takes place though the Stock Exchange. The Stock Exchange facilitates the transactions. Before a stock can be traded the company of that particular stock has to be listed on the Stock Exchange. Generally speaking American stocks are listed on one of the exchanges in American and UK stocks are listed in the Stock Exchange in UK.
What is a Share?
A share is the unit that represents an ownership of a company. When owning a share you own part of the company that issued the share.
Why do companies float their stock on the Stock Exchange?
Generally companies float their stock on the Stock Exchange to raise capital for the company, for example for expansion or paying a debt. By listing the stock on the Stock Exchange it can create a market for the stock and thereby reach the liquidity needed to sell the shares.
How do companies float their stock on the Stock Exchange?
The company will do what is called an IPO (Initial Public Offering) where the company lists their stocks for the first time. The company will often hire an investment bank to help with the IPO, so they can correctly asses the value of the shares before listing the stock on the Stock Exchange.
The company will often make a prospectus describing the company such as, the directors, business model, goals and so on. This way the potential buyers will have all the information needed to make up their mind whether they want to be investors of that particular company.
What is a Dividend?
Dividend is what the company pays out of the company’s profit to the shareholders. Very often the company decides not to pay out any dividends despite the company having profit for the fiscal year. This happens when the company feels the money is better spent on paying off debt or reinvesting the money for growth. By paying off debt or investing in growth the shareholders can perhaps reap a capital gain in the future by seeing the price of the share climb.
What is a Market Index?
A Market Index is a group of stocks, such as Nasdaq or SP-500. This allows you to see the overall performance of the market or at least that group of stocks. You can then compare your own stocks against the Market Indices. You can also check the general trend of the market by looking at the Indices. When traders/investors talk about the market they are often referring to the Dow Jones, Nasdaq or SP-500 indices.
How do you trade the stocks on the Stock Exchange?
Before you can buy or sell any stocks you need to have brokerage account either with your bank or with one of the many online brokerage that exist today, such as Etrade or Interactive Brokers. The bank/brokerage will charge a fee whenever you buy or sell stocks.
To learn more about the importance of structuring your stock market education click this link to go back to the Stock Market Education section!