Basics of Stock Market

Updated: Aug 2, 2021

What is a Stock?

A stock is a share or a piece of a company. Each share represents a percentage of ownership within a company. For example, say you started a new company and wanted to raise 1000 to start the company.

You already have 500 but are looking to raise the remaining 500 and you find two investors willing to put in 250 each for a share in the company. You would then issue stock.

You yourself would take two shares and you would issue one share to each of the investors, giving you 50% ownership in the company and each of them 25% ownership. This stock is then what is traded on the stock market once a company goes public.

What is the Stock Market?

The stock market is a place for the sale or purchase of various company’s stocks. There are many stock exchanges throughout the world each representing part of the stock market as a whole.

What is a Stock Exchange?

A stock exchange is an institution that provides services for brokers and traders to buy and sell stock of companies. Some popular stock exchanges are the NSE and BSE.

How the Stock Market Works?

As mentioned above, the stock market is traded via stock exchanges and these exchanges act as an intermediary between the company and the trader, or a trader and another trader.

So, say for instance that you wanted to buy 100 shares of company “xyz,” to do that you would need to use a broker. You would place that order with your broker and the broker would execute the trade for you with the exchange. The broker then charges a commission to complete that trade.

Bulls and Bears?

Calling a market bearish or bullish simply states in what direction the market is moving. If the market or the stock is in an upward trend it’s considered bullish, if it’s in a downward trend it’s considered bearish.

What is a Broker?

A stock broker is a licensed professional that typically works for a brokerage firm. They buy and sell stock for traders and institutions through a stock exchange, and charge a fee or commission for their services.

What is a Commission?

A commission is a fee paid to a broker to conduct a trade for you. This fee can either be a flat amount per trade, a percentage based on the value of a trade, or a combination of the two.

Trading vs Investing

The biggest difference between trading and investing is the motivation. When investing, someone is looking to hold a stock for a long period of time and to build wealth over that time.

Investing typically comes with much less risk than trading and is viewed as a long term strategy. Trading on the other hand, is for people looking to turn a profit quickly.

There is typically much more risk involved with trading (whether it be day trading or a longer term swing trade). Trading is a shorter term holding of a position than investing-sometimes for as little as only a few seconds. Technical analysis is often used when trading, as opposed to more fundamental analysis when investing.

Long vs Short

Many traders get tripped up by the terms “long” and “short”. Typically people take these to mean holding the stock for a long period of time or a short period of time.

However, going long or going short has a very different meaning in the trading world. When someone says they are going long they are trading a stock in the typical manor of buying and then selling.

Shorting is the exact opposite. When someone shorts they are actually selling the stock before they buy it, in hopes that the stock will go down and they will then be able to buy it back for less than they sold it for.

What are Market Makers?

A market maker is typically a bank or institution whose responsibility is to add liquidity to the market. The market maker is buying and selling based on the bid and ask prices, and makes a profit based on that spread.

Because of the digital transition of the indian markets, these market makers are not always specific people or a designated positions-but they do exist. For other markets, like commodities or foreign exchanges, a market maker is still a very crucial position.

What is Market Capitalization?

Market Capitalization, often referred to as Market Cap, is the valuation of a company based on the value of their outstanding stock.

Market Cap is calculated by multiplying the amount of stock issued by the value per share. For instance, if a company has 1000 share of stock issued and each share is valued at 10 then the company’s market cap would be 10,000.

What is the Bid and Ask?

“The bid” and “the ask” are simply what any given stock is being sold for or bought at. “The bid” is the price someone is willing to pay for a share. “The ask” is the price at which someone is willing to sell a share.

What is a Stock Split?

A stock split or divide is just as it sounds. It is where the company decides to increase the number of shares, but then adjusts the value of those shares so that the total market cap is the same after the split.

For instance, if someone owned 1 share of company XYZ, and it was valued at 10, when the company decides to do a two-for-one split, that person then owns two shares of company XYZ and each share is valued at 5.

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