Introduction to Stock Markets
Welcome to stock market trading! In this first lesson, you'll learn what stocks are, how stock exchanges work, and why millions of people invest in equities.
What is a Stock?
A stock (also called a share or equity) represents ownership in a company. When you buy a stock, you become a partial owner of that company, entitled to a portion of its profits and assets.
Companies issue stocks to raise capital for growth, operations, or debt repayment. In exchange, investors gain potential returns through price appreciation and dividends.
Why Do Companies Go Public?
- Raise Capital: Access to large amounts of funding for expansion
- Liquidity: Existing shareholders can sell their stakes easily
- Prestige: Being publicly traded adds credibility
- Currency for Acquisitions: Use stock to buy other companies
- Employee Compensation: Stock options attract talent
How Stock Exchanges Work
Stock exchanges are centralized marketplaces where buyers and sellers trade shares. The largest exchanges are:
| Exchange | Location | Notable Stocks | Trading Hours (Local) |
|---|---|---|---|
| NYSE | New York, USA | Berkshire, JPMorgan, Walmart | 9:30 AM - 4:00 PM ET |
| NASDAQ | New York, USA | Apple, Microsoft, Amazon | 9:30 AM - 4:00 PM ET |
| LSE | London, UK | Shell, HSBC, Unilever | 8:00 AM - 4:30 PM GMT |
| TSE | Tokyo, Japan | Toyota, Sony, SoftBank | 9:00 AM - 3:00 PM JST |
US markets offer extended hours trading:
Pre-market: 4:00 AM - 9:30 AM ET
After-hours: 4:00 PM - 8:00 PM ET
Note: Extended hours have lower liquidity and wider spreads.
Stock Market Indices
An index tracks the performance of a group of stocks, representing a portion of the market. They serve as benchmarks for market performance.
Market Participants
Understanding who trades in the market helps you understand price movements:
- Retail Investors: Individual investors like you trading personal accounts
- Institutional Investors: Mutual funds, pension funds, hedge funds with large capital
- Market Makers: Provide liquidity by always offering to buy and sell
- High-Frequency Traders (HFT): Algorithms trading in milliseconds
- Insiders: Company executives and directors (regulated trading)
Institutional investors have resources, data, and execution advantages that retail traders don't. Your edge comes from patience, flexibility, and the ability to focus on opportunities they can't (smaller positions).
How You Make Money in Stocks
There are two primary ways to profit from stock investing:
1. Capital Gains
Profit from buying low and selling high. If you buy a stock at $50 and sell at $70, you make $20 per share (minus fees and taxes).
2. Dividends
Some companies distribute a portion of their profits to shareholders as dividends. This provides regular income regardless of price movements.
| Approach | Focus | Time Horizon | Example |
|---|---|---|---|
| Growth Investing | Capital gains | Long-term | Buying Tesla for price appreciation |
| Income Investing | Dividends | Long-term | Buying Coca-Cola for steady dividends |
| Trading | Short-term gains | Days to months | Swing trading momentum stocks |
Key Stock Market Terms
đ§ Test Your Knowledge
1. What does buying a stock represent?
2. Which index tracks 500 of the largest US companies?
3. What are the two main ways to profit from stocks?
đ Lesson Summary
- A stock represents partial ownership in a company
- Stock exchanges (NYSE, NASDAQ) are marketplaces where shares are traded
- US markets trade 9:30 AM - 4:00 PM ET with extended hours available
- Market indices (S&P 500, Dow Jones) track groups of stocks as benchmarks
- Profits come from capital gains (price appreciation) and dividends
- Market participants include retail investors, institutions, and market makers