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Introduction to Investing

Chapter 6. Stock Market Basics

SR Team - 25 August 2024

Stock Market Basics

The stock market is a fundamental component of the global financial system, allowing you to own a portion of companies to benefit from their growth and profits. In this chapter, we will explore the basics of stock market investing, discussing how the stock market works, the different types of stocks, and how you can buy and sell stocks.

How the Stock Market Works

The stock market is a platform where companies raise capital by issuing shares of stock to the public, and investors buy and sell those shares in hopes of earning a profit. The two leading stock exchanges in the UK are the London Stock Exchange (LSE) and the Alternative Investment Market (AIM). In the US, the two leading stock exchanges are the New York Stock Exchange (NYSE) and the National Association of Securities Dealers Automatic Quotation System (Nasdaq).

  • Stock Exchanges: These are platforms where stocks are traded, providing a marketplace for buyers and sellers to interact and facilitating securities trading.

  • Market Participants: These include investors, brokers, and market makers. Investors buy and sell stocks, while brokers act as intermediaries between investors and the stock exchange. Market makers provide liquidity to the market by buying and selling stocks.

Types of Stocks

There are several types of stocks that investors can buy and sell:

  • Common Stocks: Common stocks represent ownership in a company and give shareholders voting rights. They offer you the potential for long-term growth and income through dividends.

  • Preferred Stocks: Preferred stocks have a higher claim on assets and dividends than common stocks but do not offer voting rights. They typically offer a fixed dividend rate and are considered less risky than common stocks.

  • Growth Stocks: Growth stocks are issued by companies that are expected to experience high growth rates in the future. They offer you the potential for long-term capital appreciation but may come with higher volatility.

  • Value Stocks: Value stocks are issued by companies that are considered undervalued by the market. They offer you the potential for long-term capital appreciation and income through dividends.

How to Buy and Sell Stocks

Buying and selling stocks involves several steps:

  • Opening a Brokerage Account: You must open a brokerage account with a licensed broker to buy and sell stocks.

  • Placing Trades: You can place trades through your broker, specifying the stock you wish to buy or sell, the quantity, and the price.

  • Executing Trades: A broker executes the trade on the stock exchange, and your account will be updated accordingly.

Key Takeaways

Understanding the basics of investing is essential if you want to participate in the stock market. Knowing how the stock market works, the different types of stocks, and how to buy and sell stocks can help you make far more informed investment decisions.

In the next chapter, we will explore the world of bonds and fixed-income investments, discussing the basics of bond investing and how to get started in the bond market.