For those unfamiliar with the stock market, it can seem like it’s speaking a foreign language at times. But this doesn’t have to be the case. With a little explanation, and once you get passed the jargon and cut through the stock market speak, anyone can acquire the knowledge they need to profit like an expert investor.
Let’s start at the beginning. What is the stock market, and why do investors buy stocks? The stock market enables investors to buy stocks and participate in the financial achievements of publicly traded companies. The investors who own those shares earn money when they increase, and so make a profit on their investment at the point of purchase. This profit takes the form of dividends paid by the company, or selling stocks at a higher price than you paid to other investors (this is referred to as a capital gain). The flip side of this is that when the company incurs a loss, the stocks decrease in value and if the investors choose to sell, they lose money.
So far, so simple. But let’s go a little deeper into the terms that investment professionals use and the way the stock market is structured. Exchanges are the places where investors who want to buy and sell stocks meet (a good analogy is your local farmers’ market, for example). These exchanges are now predominantly digital, with trades processed by computers and almost no physical share certificates.
These exchanges trade hundreds, even thousands of different stocks, so it’s incredibly helpful to see whether the market is trending up or down overall. This need led to the creation of indices. Each index is an average of a certain number of different stocks and refers to either the whole market or a segment of that market. Over time, the indices change in value, providing a good benchmark for investors to compare their own results against. And to make the indices more useful, we organise, segment and analyse the market by sectors and industries, such as technology or healthcare. This helps us see which areas are performing well in the economy generally, and which are losing value.
You might have seen the statue of the bull in New York’s Financial District and wondered why it was there. And if you didn’t before, you’re probably asking yourself why now. Basically, this is because the state of the market is often referred to as either bull or bear. These animals stand as metaphors for market movement, with a bull market meaning that the market is going up in value (because when bulls fight they attack with their horns from the bottom up). On the other hand, a bear market is one which is trending downwards (as a bear swipes its paws down when fighting).
That covers the markets, but what about the stock itself? With so many different types across the global markets, how do you identify the one you want and begin to deal? This is where the ticker comes in. The ticker simplifies the trading process by giving each stock a name in the form of a few letters or numbers. These enable investors to know exactly which stock they’re dealing with, whichever market they’re in at the time. For example Apple trades as AAPL, and Facebook is FB.
Once you’ve identified your stock, you’ll want to know the price it’s at. As with any purchase you make, if you’re the buyer you’re going to want a lower price for the stock than if you’re the seller. So to buy a stock, you have a BID price; to sell, an ASK price. The BID is the best price a buyer is willing to pay for that stock, while the ASK is the best price the seller is willing to receive. These prices are likely to be different, and the difference between them is known as the spread. The smaller the gap between prices, the higher the liquidity of the stock.
With this knowledge on your side, all you need to do next is start investing. There are lots of advice and useful tools out there to help you on your investment journey, so you don’t have to undertake it alone. If you keep your eyes open and, crucially, research your opportunities thoroughly, you’ll be profiting like an expert before you know it.
I’ll be back next month with part two, when I’ll explain the different types of trading orders and how using them effectively will lead you to profit.
Gaspar d’Orey is CEO and co-founder Zercatto
