Understanding The Stock Market | Everything You Need to Know

The Stock Market

What is the Stock Market?

The stock market is a collection of markets and exchanges where people buy and sell shares of publicly-held companies. A trade will occur when someone has shares they want to sell for cash, and another person has cash they want to use to buy shares. You will execute the trade once the price is agreed on. With millions of trades happening daily, the value of a stock or market sector will fluctuate in price depending on investors’ optimism. For this reason, the stock market can be a good indicator of the current and near-future economic standing.

When Does the Stock Market Open/Close?

The U.S stock exchange is open Monday-Friday from 9:30 am to 4:00 pm (EST). However, the markets are closed on some holidays. These occasions include Christmas, Thanksgiving, Labor Day, Martin Luther King. Jr. Day, etc. In addition, the markets close early in some circumstances, such as Christmas Eve and Black Friday.

Along with the normal hours, there is a pre and post-market where you can perform trades. The pre-market is from 8:00 am to 9:30 am (EST). In addition, the post-market is from 4:00 pm to 8:00 pm.

What Types of Investments Are on the Stock Market?

There are two main ways to invest in stocks, buying shares of an individual company or investing in Mutual/Index/ETF funds.

Investing in an Individual Company

Buying shares of an individual company will lead to price fluctuations largely depending on performance and public opinion. A company that continually posts quarterly profits and has a positive media presence will typically see consistent stock price growth. On the other hand, if a company has a bad quarter financially or runs into a lawsuit, their stock price might decrease. These are the risks involved in individual stocks that need to be analyzed before investing.

Investing in Mutual/Index/ETF funds

Mutual funds, Index funds, and ETFs are all very similar in that they are professionally managed investments. They also use a pool of money from investors to purchase a diversified selection of securities. In other words, they consist of a group of preselected companies that can be purchased at one price and managed by someone else. For example, the S&P 500 Index tracks 500 of the largest companies listed on the U.S stock exchange, which you can purchase at around $3,850 as of today (2/26/21). The money invested in this index will be divided into 500 companies, with the largest companies getting a larger percentage. Investing in these types of funds typically sees less fluctuation than individual stocks and moves depending on the country’s overall economic outlook.

In addition, there are Indexes for specific market sectors such as tech, finance, energy, small-cap, large-cap, and everything in between. Investing in these funds can be a great way to diversify your portfolio.

How Can You Make Money From Investing in Stocks?

There are two ways that you can make money from investing in stocks, price increase and dividend payouts.

Stock Price Increase

One way to make money in the stock market is by buying and selling shares of a company or index fund. Once the shares you purchased have increased in value, you can sell them for profit. The challenge behind this is knowing which stocks will increase in value and when to buy/sell. Veteran investors in the stock market recommend buying and holding investments for the long term. Historically, investors who hold good long-term investments (1 year or longer) typically see better returns. There is less risk the longer you hold your investment. This is because the market tends to hit new record highs constantly. This does not apply to companies that are going out of business or sectors that are losing relevance.

Dividend Payouts

The second way to make money from the stock market is by receiving dividend payouts. A dividend is a share of profits and retained earnings that a company pays out to its shareholders. In other words, a company will reward you for investing in their company by paying you a bonus. The bonus is a percentage based on how much of their company you own. In most cases, companies will pay dividends quarterly, and this will create a compounding effect. However, it is important to look at a companies dividend payout. Not all companies offer it, and some have significantly higher percentages than others. This is something to be aware of before investing.

Important Terminology to Understand.

  • Bull market– A market in which share prices are rising, encouraging buying.
  • Bear market– A market in which share prices are falling, encouraging selling.
  • Growth stock– A company that is expected to grow sales and earnings faster than the market average.
  • Dividend stock– Companies were fast growth may not be expected but offer higher than average dividend yields.
  • Stock market correction– When the markets decrease between 10-20% before recovering.
  • Options trading– Buying a contract that gives you the right to buy or sell a stock within a given timeframe. This gives you options without having to pay for it upfront at its actual market price.
  • Day trading– Buying and selling multiple securities within the same day.
  • Down– When a stock or index price is lower than it was when the market opened.
  • Up– When a stock or index price is higher than it was when the market opened.

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