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Welcome to the first lesson of the Introduction to Stock Trading course. The stock market can seem complex at first, but understanding how it works is an important step toward making informed trading decisions.
In this lesson, you will learn the basic concepts of the stock market, its origins, and some essential terms that every trader should know.
To understand stock trading today, it helps to look at where it all began. The concept of trading can be traced back to the exchange of physical goods and commodities in ancient markets. However, modern stock trading officially began in 1602 with the establishment of the Amsterdam Stock Exchange.
This marked a significant shift: for the first time, individuals could buy and sell shares in a company. It was a groundbreaking idea that allowed businesses to raise capital more effectively and gave individuals the opportunity to invest their money in return for potential profits.
As this model gained popularity, more companies began issuing shares, leading to the development of organized stock exchanges to facilitate these transactions.
To grasp how the stock market works, it’s helpful to break it down into clear, simple concepts. While the stock market can seem complex, at its core, it is a system where individuals and institutions buy and sell ownership in companies through shares.
A stock, also referred to as a share or equity, is a financial instrument that represents partial ownership in a company. When you purchase a stock, you are essentially buying a small portion of that company, known as a share.
So, what does it mean to own a stock?
Owning a stock gives you a stake in the company’s assets and earnings. The extent of your ownership depends on how many shares you hold compared to the total number of shares issued by the company.
Let’s consider an example. Let’s say you want to invest in Apple, the tech giant.
When you buy shares of Apple, you become a part-owner of the company.
As the company profits and grows, so might the value of your shares.
Remember that investing in stocks carries risk, as the market can be unpredictable, and share values can fluctuate.
You may wonder how stocks come into existence. Companies create stocks through a process called an Initial Public Offering (IPO)—the first time a company offers its shares to the public. This marks the transition from private to public ownership.
What does “private to public” mean?
A private company is typically owned by its founders, early investors, and a small group of stakeholders such as employees. At this stage, the company’s shares are not available for public trading on stock exchanges.
These early shareholders have stakes in the company, but they can't buy or sell shares on the public stock exchanges.
As a company grows and needs more capital to expand further, it might decide to 'go public', which means it wants to sell its shares to the public. Here, the company goes for an IPO.
Stock exchanges are the marketplaces where stocks are bought and sold. They are organized and regulated environments that ensure fair, transparent, and efficient trading.
A stock exchange facilitates the buying and selling of company shares, determines prices based on supply and demand, and provides a platform that connects investors with listed companies.
As discussed earlier, companies become publicly traded by listing their shares on a stock exchange through an Initial Public Offering (IPO). Once listed, their shares can be traded by individual and institutional investors alike.
For example, when Apple releases a new product and it's well-received, more people might want to buy Apple's stock. This increased demand can push the price up on stock exchanges.
Here are some of the major stock exchanges around the world:
New York Stock Exchange (NYSE): The NYSE, located in New York City, is the world's largest stock exchange by market capitalization
NASDAQ: Predominantly known for technology and internet-based companies, NASDAQ is a global electronic marketplace for buying and selling securities.
London Stock Exchange (LSE): The LSE is one of the oldest and most prestigious exchanges in the world.
Stock exchanges, therefore, provide companies with access to capital. By listing on a stock exchange, a company can raise money from a large pool of investors to fund operations and growth.
Stock market indices are key indicators used to measure and track the performance of a specific group of stocks. They provide a snapshot of how a particular segment of the market is performing, helping investors gauge overall market trends.
For instance, the S&P 500 (Standard & Poor’s 500 Index) represents 500 of the largest publicly traded companies in the United States. When the S&P 500 rises, it generally indicates that the average value of these companies' shares has increased, reflecting positive market sentiment.
Other notable indices include the Dow Jones Industrial Average (DJIA), which tracks 30 major U.S. companies; the NASDAQ Composite, which includes a large number of technology-focused stocks; and the FTSE 100, which tracks the top 100 companies listed on the London Stock Exchange.
Here are some stock market terminologies you need to grasp before continuing the course:
Share: A share is a piece of ownership in a company.
Dividend: A dividend is a share of a company's profit given to shareholders.
Bull Market: A bull market is a period when stock prices are rising.
Bear Market: A bear market is a period when stock prices are falling.
Market Capitalization: Market capitalization is the total value of all a company's shares combined.
Broker: A broker is a person or company that buys and sells stocks for others.
Trading Volume: Trading volume is the number of shares traded during a certain period.
P/E Ratio (Price-to-Earnings Ratio): The P/E ratio compares a company's stock price to its earnings per share.
Liquidity: Liquidity refers to how easily stocks can be bought or sold without affecting their price.
Consider this list your cheat sheet for the upcoming concepts you need to learn about stock trading.
As you can see, investing in the stock market offers both potential rewards and risks.
Understanding these can help investors make more informed decisions. Here are some of the key risks and rewards:
Capital Gains: One of the most significant rewards of stock trading is the potential for capital gains, which occur when the price of a stock increases above the purchase price.
Dividend Income: Some stocks provide regular dividend payments, offering a source of income for investors.
Portfolio Diversification: Stocks offer a way to diversify an investment portfolio, which can reduce risk.
Ownership in Companies: Buying stocks means you own a part of the company, giving you a share in its potential growth and success.
Market Risk: The stock market can be volatile, with prices fluctuating due to various factors like economic changes, political events, or company-specific news.
Liquidity Risk: Some stocks may be difficult to sell quickly without impacting the price, particularly in volatile or bear markets.
Company-Specific Risk: The performance of individual companies can impact the stock price, meaning poor performance or bad news can lead to a decline in stock value.
Inflation Risk: Inflation can erode the purchasing power of future earnings from stock investments.
The stock market began centuries ago with the trading of physical goods.
The stock market is a system for buying and selling shares of companies.
A stock represents ownership in a company.
Companies go from private to public through IPOs, allowing public stock trading.
Stock exchanges like the NYSE, NASDAQ, and LSE are platforms for buying and selling stocks.
Indicators like the S&P 500, DJIA, and NASDAQ Composite measure market performance.
Now that you know the stock market basics, the next lessons will explore stock trading, including its workings, types of stocks, and risk management, helping you trade with confidence.
Our easy-to-use glossary breaks down complex trading terms into plain English. Learn the key terms every trader needs to know.
Explore our latest blog posts for trading tips, market insights,and real-world strategies. The XS blog keeps you informed, inspired, and ready to trade.
