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Students’ Guide to the Stock Market

Investing
Bruce Gordon

The stock market is more than just a get-rich-quick tool; in fact, for most people, slow and steady wins the race. Many investment bankers devote endless time and energy to analyzing the market and getting the best deals for their clients. Companies benefit from the stock market because it allows them to raise money from investors. A company’s performance on the stock market is an indicator of the company’s financial future. When investors are confident in a company’s management and products, they buy more shares, driving the individual share price up; when a company is performing badly, its individual share price decreases. The stock market exerts a large influence on the strength of the American economy. In fact, two of America’s most difficult financial periods, the Great Depression and the Great Recession, were preceded by stock market difficulties.

What Is the Stock Market?

The stock market is both a virtual and a physical market where investors buy and sell shares of companies’ stock. Companies that have shares for sale on the stock market are known as publicly traded companies. The performance of the stock market is tracked using stock market indices. An index represents a certain subsection of the market and is an indicator of the market’s overall health.

Stock Market Basics

Trading on the stock exchange is all about timing. Certain events can drive prices of shares up or down. Stock traders try to anticipate the rise or fall of the value of the shares they own so that they can buy shares while they’re cheap and sell shares before their value drops. Stock traders make money by selling shares for more than the original purchase price. There are many different types of stock traders, from day traders who initiate several transactions over the course of one day to position traders who hold their stocks for much longer periods of time. The stock market is governed by a set of rules aimed at making sure that no one has an unfair advantage while trading.

What Are Stock Exchanges?

A stock exchange is a place where investors and traders can purchase and sell their shares in a centralized location. Most investors don’t trade their stocks directly: Instead, they go through a broker who can help them create a diversified portfolio. A diversified portfolio includes shares from multiple companies, so that an investor doesn’t put all of their eggs in one basket. Famous stock exchanges include the New York Stock Exchange and the Nasdaq. Alternatives to stock exchanges include electronic exchanges and OTC exchanges.

All About Stocks

A stock represents partial ownership of a company. There are many different levels of stocks. Some shares might be reserved for the company’s founders; these are known as founders’ shares. There is preferred stock, which confers an additional level of voting rights on the shareholders. But most shares traded on the stock market are common stock. Stocks are different than bonds, which represent debt certificates. Bondholders have no ownership rights in the company; the bond certificate only represents the right to receive the money paid plus accrued interest in accordance with the conditions of the bond purchase agreement.

Glossary of Stock Market Terms

Bear Market: When the stocks experience declines for a long period of time, the market is called “bearish.”

Bull Market: When the market is bullish, the prices are going up or there is a prediction that prices will rise over the upcoming period.

Dividends: Dividends are a company’s profit distributions to its shareholders.

Initial Public Offering: An initial public offering, also called an IPO, is a company’s first issuance of shares on the stock market.

Leverage: Investors use leverage to amplify their buying power in the stock market, borrowing funds from their brokerage in order to increase their returns (see margin).

Margin Trading: Margin trading is when a trader borrows money from a brokerage to buy stocks, using the cash or securities already in their account as collateral.

Spread: The spread is the price difference between the lowest price asked per share for purchase of a stock and the highest price bid for it. The ask is always higher than the bid.

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