Stock Market 101
The stock market is a place where people can buy and sell shares of companies, which represent a fraction of their ownership and value. The stock market can be a source of wealth creation, as well as a way to track the performance of different sectors and industries of the economy. In this article, we will explain some of the basic concepts and terms related to the stock market, such as initial public offerings, dividends, capital gains, indexes, and stock exchanges.
What is an Initial Public Offering (IPO)
An initial public offering, or IPO, is when a company decides to sell its shares to the public for the first time. This is usually done to raise capital for expanding or developing the business, or to increase its visibility and credibility.
An IPO involves dividing the company into pieces, called shares, which represent a share in the company’s ownership and profits. These shares are then sold as stocks, or more accurately, shares of a stock, to investors who are willing to pay a certain price for them.
The investors who buy the shares become shareholders, or partial owners of the company. They have the right to vote for the members of the company’s board of directors, who oversee the management and strategy of the business. They also have the right to receive a portion of the company’s profits, if the company decides to distribute them.
How do Investors Make Money from Stocks
There are two main ways that investors can make money from stocks:
Dividends are payments that a company makes to its shareholders from its retained earnings, which are the profits that the company keeps after paying its expenses and debts. Some companies pay dividends regularly, while others may pay them occasionally or not at all. Some investors prefer to invest in stocks that pay dividends, as they provide a steady income stream. However, dividends are usually taxable, and may reduce the company’s ability to reinvest in its growth.
Capital gains are the profits that an investor makes when they sell a stock for a higher price than they bought it. For example, if an investor buys a stock for $10 and sells it for $15, they have a capital gain of $5 per share. Capital gains are usually realized when the company’s performance, prospects, or reputation improve, or when the demand for its stock increases. However, capital gains are also taxable, and may not be guaranteed, as the stock price can fluctuate due to various factors.
How do Investors Track the Market
The stock market is not a single entity, but a collection of different markets, where different types of stocks are traded. To measure and compare the performance of these markets, or segments of them, investors use various indexes, which are numerical values that represent the average or aggregate of a group of stocks.
Some of the most widely used and recognized indexes are:
Dow Jones Industrial Average (DJIA): This index was created in 1896 by Charles Dow, who calculated the average of the closing prices of 12 stocks of leading industrial companies. Today, the DJIA consists of 30 stocks of large and well-known companies from various sectors, such as Apple, Coca-Cola, McDonald’s, and Walmart. The DJIA is often considered as a proxy for the overall health of the US economy, as it reflects the performance of some of its most influential and dominant firms.
S&P 500: This index is published by the Standard & Poor’s Company, and is based on the prices of 500 stocks of leading companies from various industries of the US economy, such as Amazon, Facebook, Google, and Microsoft. The S&P 500 is widely regarded as the best representation of the US stock market, as it covers about 80% of its total value. The S&P 500 is also used as a benchmark for many mutual funds and exchange-traded funds (ETFs), which are investment vehicles that track the performance of a basket of stocks or other assets.
Nasdaq Composite: This index is based on all the stocks that are listed on the Nasdaq stock exchange, which is one of the largest and most popular stock exchanges in the world. The Nasdaq exchange specializes in listing technology and innovation-oriented companies, such as Apple, Intel, Netflix, and Tesla. The Nasdaq Composite reflects the performance of over 3,000 stocks, most of which are from the technology sector, but also from other sectors, such as health care, consumer services, and financials. The Nasdaq Composite is often seen as a gauge of the innovation and growth potential of the US economy, as it showcases some of its most dynamic and cutting-edge firms.
There are hundreds of other indexes that track the market or segments of the market, ranging from the very broad Wilshire 5000 Total Market Index, which covers almost all the stocks traded in the US, to the more specific and niche indexes, such as the FTSE4Good Index series, which measures the performance of companies that meet certain environmental, social, and governance (ESG) criteria.
What are the Major Stock Exchanges in the World
A stock exchange is a place where stocks and other securities are bought and sold. A stock exchange provides a platform for buyers and sellers to meet and trade, as well as a set of rules and regulations to ensure fair and orderly transactions. A stock exchange also provides information and data on the prices, volumes, and trends of the stocks and markets that it lists.
There are thousands of stock exchanges in the world, but some of the most prominent and influential ones are:
New York Stock Exchange (NYSE): The NYSE is the oldest and largest stock exchange in the world, founded in 1792 and located in Wall Street, New York. The NYSE handles about 31.5% of the world’s stock market value, and lists some of the most prestigious and powerful companies in the world, such as Berkshire Hathaway, Exxon Mobil, JPMorgan Chase, and Walmart. The NYSE is also home to some of the most iconic and historic events and symbols of the stock market, such as the opening and closing bells, the trading floor, and the bull and bear statues.
Nasdaq: The Nasdaq is the second-largest stock exchange in the world, founded in 1971 and headquartered in New York. The Nasdaq is known for its electronic and online trading system, which allows for fast and efficient transactions. The Nasdaq is also the preferred listing venue for many technology and innovation-oriented companies, such as Apple, Microsoft, Amazon, and Facebook. The Nasdaq is often associated with the high-growth and high-risk profile of the technology sector, as well as its volatility and unpredictability.
Tokyo Stock Exchange (TSE): The TSE is the third-largest stock exchange in the world, founded in 1878 and located in Tokyo, Japan. The TSE is the dominant stock exchange in Asia, and lists some of the most prominent and influential companies in Japan and the region, such as Toyota, Sony, Honda, and SoftBank. The TSE is also the main source of information and data on the Japanese economy, which is one of the largest and most advanced in the world.
London Stock Exchange (LSE): The LSE is the fourth-largest stock exchange in the world, founded in 1571 and located in London, UK. The LSE is the leading stock exchange in Europe, and lists some of the most prestigious and diverse companies in the world, such as BP, HSBC, Unilever, and GlaxoSmithKline. The LSE is also the hub of the international financial market, as it offers access to a wide range of securities and currencies from different countries and regions.
Conclusion
The stock market is a fascinating and complex phenomenon that affects the lives and fortunes of millions of people around the world. It offers opportunities for wealth creation, as well as risks and challenges. To navigate the stock market, investors need to understand its basic concepts and terms, such as IPOs, dividends, capital gains, indexes, and stock exchanges. By learning how the stock market works, investors can make informed and rational decisions that suit their goals and preferences.
Whenever you’re ready, there are 3 ways I can help you!
Organize Your Money Course: Are you ready to take control of your financial future, instead of letting it control you? This course will help relieve your financial anxiety and get you back on track.
Book a 1-on-1 Meeting: Whether you’re looking for assistance with your financial planning needs or are in the financial industry and you want to learn how to grow your practice, I can help.
Lake Avenue Financial: If you’re looking to build a relationship with a team who can help simplify, educate, relive the stress caused by money decisions and make sure you are on your way to financial independence, we are here to help!
Be Inspired to take Action
Join readers of the Inspire Action newsletter for tips, uplifting stories and actionable steps to guide you through your financial journey.