Stock Market for Beginners
Do you want to be a well rounded stock trader?
Whether you're a beginner or intermediate level trader and wondering where to start learning stock trading, you've come to the right place. It can be frustrating not knowing who to trust as there's so much information around AND not all of it is correct or helpful.
At Trade With Precision, we live & breathe trading... that's what we do! We are full-time traders and we're great educators because we have experienced at some stage what you're going through now.
Everyone learning trading has made mistakes and we want to share our experiences with you so you can understand & LEARN from these mistakes.
The first step is to watch this video.
Watch our video: How to Trade Stocks with Precision - Free Webinar Recording
This is essential viewing for anyone who is new to trading or new to trading the stock market.
In this free video recording:
- We will demystify the stock market for you
- Discover the benefits of trading stocks over other markets
- Explore the risks of trading and how to easily overcome them
- Learn 3 simple scanning techniques to dramatically reduce your screen time
First of all, what is a stock?
There are lots of different names used when people refer to the stock market. Some of those are stocks, share and equities. These names are often used interchangeably all the time.
A company will list onto a stock exchange in order to raise capital for various reasons. They may want to get rid of some debt. They may want to raise money for expansion. The owners may want to recoup some profit or equity from other companies. There are lots of reasons why a company will list on a stock exchange. What happens when they list is that they basically break their company up into small portions then they sell it off to the general public through what we call an initial public offering. So you might hear others talk about IPOs or “I’d like to trade IPOs” people like to say that a lot. So basically what that is, is someone trying to buy first shares in that company. The most famous one people are familiar with is Facebook. I’m sure you’ve heard about that when Facebook listed into stock exchange.
What does a stock represent?
A stock represents a part ownership in a company. So if you own a thousand stocks on Facebook then you are a part owner of that company and you will have a say in what the company does. Not only do you have voting rights to be able to impact the direction of the company but you also receive a share of the profits which is called dividends. So those are the two main things you’ll get when you own a share in a company are the right to receive dividends and the right to vote, to influence the direction that the company is going to take.
What is a stock exchange?
What is a stock exchange? It’s usually a physical location where traders meet to conduct business but more and more these days, nearly exclusively these days, it’s through an electronic platform where traders meet and are able to buy shares off each other. There are a few core functions that a stock market will have. It is to establish rules of fair trading. Then they regulate the trading activities. They act as a clearing house for each transaction and they supply mechanism for settlements.
The stock exchange also pass out and spread the information out to the general public so you can find out about the price of any stock that you want that’s on the market. Most stock trading these days is electronic and most trading is done electronically. Very very rarely is trading done like this anymore when it comes to the stock market.
Who are the major international stock exchanges?
Some of the major international stock exchanges that you hear about are the two most prominent ones which are NYSE or New York Stock Exchange and the NASDAQ. Now the NASDAQ is mainly technological stocks. Other major stock exchanges around the world are Tokyo Stock Exchange, London Stock Exchange, Euronext, Deutsche Borse, Hongkong Stock Exchange. There are many other stock exchanges around the world, but they are quite small in comparison to those listed above. There are many stocks you can trade on your own home stock market currency and that is the beauty of stock markets.
You’re also not restricted to your home country. You can trade on any stock market you really want.
What is a stock market index?
Market index is a basket of stocks which measure a segment of the market; they usually group stocks together based on either their capitalisation or certain characteristic. Their capitalisation is for example the NASDAQ 100, you hear that referred to a lot, that basically is just the top 100 stocks listed on the NASDAQ exchange based on capitalisation.
What is capitalisation?
Capitalisation is basically the general worth of the company. So for example Facebook; if they have (not real figures) a million shares that have sold out during the initial public offering and those million shares currently sell for $10 a share. Which means the capitalisation of Facebook will be $10 million. A million shares times the $10... equals $10 million.
The other way that you can come up with stock market indices is by characteristics. They may group altogether the stocks that relate to technology or energy or electricity and they’ll group all those together so you can see as a general how that market is doing as opposed to the individual stocks within that market.
What is the purpose of that?
Generally you get to see how the whole market is doing. You will see it quoted in the news every night. They’ll say they Dow Jones which is actually the top 30 stocks by capitalisation, “The Dow Jones is in an all time high right now.” So that is going to give you a general idea that overall the stock market is doing quite well, it’s rallying quite high. If they say it’s plummeted, then you’ll know. Generally the stocks in the stock market are suffering as well. So they’re doing that overview of what the market is doing rather than for you having to go through 4,000 stocks trying to work out what the general market is doing.
Some of the major stock indices are the S&P 500, which is the largest 500 publicly listed companies in the USA.
Dow Jones is the top 30 stocks listed on the NYSE.
NASDAQ 100 which is the largest 100 nonfinancial stocks listed on the NASDAQ, technology stocks typically.
FTSE 100, the largest 100 stocks listed on the London Stock Exchange.
Why are the indices important?
You can’t actually trade these indices but why you’ll look at them is you want to have a feel for what the overall market is doing.
There are two ways you can trade stocks.
The most common way to trades stocks is to do it by buying/selling a company’s physical stocks via a stock market. If you want to buy a thousand Apple shares, you'll go through a broker and let’s say they’re selling at $100 each you have to come up with $100,000 to physically buy those thousand shares. The disadvantage to trading stocks this way is there is no leverage. You need to have 100% money in your account to buy those stocks.
The other way of trading stocks is by using a derivative. If you’re in the US you can use Single Stock Futures, in the UK Spreadbetting and Contracts for Difference (CFDs), for those in New Zealand or Australia generally you use CFDs. There are a lot of ways to use derivatives, there are options and avenues you can use to trade stocks without the physical buying of the stock. The advantage of using a derivative is that you get this leverage ability. You get to control a bigger asset with a small capital outlay. You need less money to take a position of the same exposure.
If you’re physically buying a stock, say you want to buy 1,000 shares at $20 then you have to outlay $20,000
But if you’re using a derivative say like a CFD for example and there’s a 5% margin, when you want to take a $20,000 position your broker will say, “You’ll only need to put up a 5% margin and I’ll lend you the remaining 95%.” So that’s similar to you having to go and buy a house. You say, “Hey Mr or Ms Banker, I’ve got 5% deposit will you lend me the remaining 95% so I can go out and buy my house?”
In this situation your broker is going to lend you the remaining 95% and you’ll go through the deal and you’re going to have to pay them regular interest on the amount you’ve borrowed from them. So the person using the derivative has only had to outlay $1,000 but they’re controlling the same 1,000 shares as this physical share person is. They’re both controlling the same amount of shares but this person only has to outlay $1,000 and this person $20,000.
If you'd like to know more about trading stocks profitably and the benefits of trading stocks over other markets, plus learn how to manage the risks involved, then please watch our free in depth video where we'll cover in more detail what you need to know about trading stocks over other markets