Are you new to the world of trading and wondering where to get started? This article will help ease you in by equipping you with some basic knowledge and pointing you in the right direction for furthering your education. First of all, before we know what a stock market is, we need to know what the term “stock” means. So, what is a stock? Let’s jump in 😉
- What is a stock?
- What is a stock market?
- Things to consider before buying a stock
- How to start trading stocks
- Next steps
Interact with the underlined words and green dots to get additional details and explanations.
Explanations and definitions of terms.
What is a stock?
Public companies issue stocks to gain capital and find investors who are interested in their business. This helps to raise funds and grow the company. Purchasing a stock, or shares of a stock, means purchasing a small piece of a company. When you buy a stock, you become a part-owner of that company. For example, if a company has 100 shares, and you buy one of them, you own 1% of that company.
Companies issue shares for the first time in what is called an initial public offering, or IPO. Along with selling shares, a company going through this process ceases to be privately held and instead becomes a public corporation. So, if a company wants to raise money, they offer or issue shares to individuals. These individuals are also known as investors, and once they buy a company’s shares, they own a fraction of that company. These investors can make a profit by selling the shares to others at a higher price than what they bought them for.
Read more: Shares vs. stocks: Are they the same or different?
What is a stock market?
Connecting buyers and sellers, a stock market is an exchange that facilitates the purchase and sale of stocks, and where companies list their stock for people to buy and sell. So, a stock exchange can be thought of as a market where shareholders gather to trade shares. There are about 60 stock exchanges in the world. Some of the most significant ones are the New York Stock Exchange, Nasdaq, Shanghai Stock Exchange and the London Stock Exchange. The New York Stock Exchange is the largest stock exchange in the world.
Things to consider before buying a stock
Investors don’t just wake up one day and buy stocks. They, first of all, analyze the overall strength of the company they want to invest in and learn about the company’s management. This is called a fundamental analysis. Here are some of the things that are considered when looking to invest in a company:
📊 Company reports
Annual, quarterly and sustainability reports provide a clear idea of what the company is working on and where they are headed.
💸 Balance sheet
A company’s balance sheet lets investors know how much debt the company carries, if any.
💰 Income statement
Outlined in annual and quarterly reports, companies report their income statements quarterly, which allows investors to understand how its revenue and sales are growing.
🧾 Cash flow statement
This section of a company’s financial reporting helps investors analyze the movement of cash going in and out of the company.
🤑 Dividend history
Some companies pay a percentage of their income to shareholders as a bonus, which is known as a dividend. Once investors feel positive about a company’s dividend history, they may consider buying its shares.
Other data that investors look at includes the company’s P/E ratio, PEG ratio, its ROE, EPS growth and more.
Read more: Key things to look out for before trading on a stock
How to start trading stocks
As a company’s stock starts trading on the stock market and the law of supply and demand kicks in, the value of its stock starts to fluctuate — that is, it becomes volatile and goes up and down. Using technical analysis tools, we can predict whether a stock’s price will be up or down at a particular time in the future.
There are many brokers out there that provide platforms for trading and predicting the price of stocks. By trading stocks with these brokers, we’re not actually “buying” stocks like the investors we discussed earlier. Instead, we predict where the price of a company’s stock will likely be in the near future and whether it will go up or down. Olymp Trade is one of these brokers. All assets on Olymp Trade are derivatives, so instead of having to spend $150 to purchase one share of Apple, traders can invest as little as $1.50.
Now that you know what the stock market is, are you excited about trading stocks? If you feel like you don’t know quite enough yet to start testing out strategies on a Demo account, check out the articles on how to pick stocks and Olymp Trade’s top tips for making money on the stock market.
Olymp Trade offers the best space to trade on different companies’ stocks. Offering a free Demo account with up to 10,000 units for beginners to practice trading strategies before venturing into the real stock market, Olymp Trade provides everything needed to get a beginner trader trading like a pro. The platform’s YouTube channel is filled with videos that teach beginners about different trading strategies, indicators and oscillators, while the Olymp Trade Blog guides both new and experienced traders with in-depth explanations. All of these educational resources are completely free.
Learn, trade and take control of your financial future with Olymp Trade. Have a happy trading experience!Go to Olymp Trade
Risk warning: The contents of this article do not constitute investment advice, and you bear sole responsibility for your trading activity and/or trading results.
Price-to-earnings ratio. Found by dividing a company’s current stock price by its earnings to give an indication as to whether a company’s stock is overvalued or undervalued on the market.
Price/Earnings-to-growth ratio. Found by dividing a company’s P/E ratio by the growth rate of its earnings to give an indication as to the value of a company’s stock in the market while factoring in its growth rate.
Return on Equity. Found by dividing a company’s net profit by the total funds that have been invested in it to show how efficiently a company’s management is generating profit.
Earnings per share. Found by dividing a company’s profit by its outstanding shares to show shareholders’ return on investment.
Refers to the magnitude of change in an asset’s price.