Stock Market Basics: What Beginner Investors Should Know

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Stock Market Basics: What Beginner Investors Should Know

To buy and sell stocks, you are required to shop via a licensed brokerage, which will execute deals on your behalf. The stock market is not like your local grocery store in this regard.

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Only instructional reasons are intended to be served by the material about investing that is given on this website. NerdWallet does not provide brokerage or advisory services, and it does not encourage or advise clients to purchase or sell certain stocks, securities, or other assets. Neither does it provide advisory or brokerage services.

If you are not familiar with the fundamentals of the stock market, the information on stock trading that is disseminated by the media might seem almost incomprehensible.

The typical investor does not place much significance on phrases such as “earnings movers” and “intraday highs,” as they should not do so in many instances. If you’re in it for the long haul — with, for example, a portfolio of mutual funds aimed toward retirement — you don’t need to worry about what these phrases imply, nor do you need to worry about the flashes of red or green that cross the bottom of your television screen. It is not necessary to have a deep grasp of the stock market in order to succeed financially.

If, on the other hand, you are interested in learning how to trade stocks, you will need to have a working knowledge of the stock market as well as at least some fundamental understanding on the operation of stock trading.


Stock market basics

Exchanges are the building blocks of the stock market. Examples of exchanges are the New York Stock Exchange and the Nasdaq. A stock is said to be listed on a certain exchange, which serves as a market for the shares of that particular stock by bringing together potential buyers and sellers. The exchange keeps track of the supply and demand for each stock, as well as the price, which is closely tied to these factors.


The majority of the time, individual traders are represented by brokers, and in today’s world, it often means an internet broker. Your interactions with the stock exchange will take place via the intermediary of the broker, who will act on your behalf while interacting with the exchange.


The New York Stock Exchange (NYSE) and the Nasdaq Stock Market (Nasdaq) are both open for trading from 9:30 a.m. to 4 p.m. Eastern time, and some brokers even offer premarket and after-hours trading sessions.


Understanding the stock market

When individuals talk about an increase or decrease in the stock market, they are often referring to the performance of one of the main market indexes.

A market index follows the performance of a collection of stocks that either reflects the market as a whole or a particular sector of the market, such as firms that are involved in the retail or technology industries. The performance of the S&P 500, the Nasdaq composite, and the Dow Jones Industrial Average are often cited as proxies for the success of the broader market, so you are likely to hear the most about these three indices.

Indexes are used by investors as a standard against which to measure the performance of their own portfolios and, in certain situations, as a guide for making choices about the trading of stocks. You may also invest in an entire index via the use of an index fund or an exchange-traded fund, often known as an ETF. These types of funds typically follow a certain market sector or index.


Stock trading information

Even the most seasoned traders might be rattled by record-high inflation and the volatile stock market, which are both caused by factors such as conflict, disruptions in the supply chain, and increasing interest rates. And the majority of investors would be wise to construct a diversified portfolio of equities or stock index funds and hang on to it regardless of whether the market is doing well or poorly.

But stock trading is for those individuals who want something a little bit more exciting. Trading stocks entails making repeated purchases and sales of shares of company stock in an effort to time the market.

Stock traders attempt to make a profit by taking advantage of short-term changes in the market in order to either sell their holdings at a premium or purchase them at a discount. Some people who trade stocks do what is known as “day trading,” which means they purchase and sell many times throughout the course of a single trading day. Others are just engaged traders who execute a dozen or more deals on a monthly basis or more. (Are you curious in trading individual stocks? Check out the stocks that have performed the best this year on our list.)

Those who invest in the stock market do considerable study and often devote several hours each day to monitoring the market. They focus on technical analysis of stocks, which involves charting the movements of a stock using various tools in an effort to identify trading opportunities and patterns. There is a large number of online brokers that provide stock trading information, including charting tools, stock research, and analyst reports. (Get familiar with the fundamentals of reading stock charts.)


Bull markets vs. bear markets

Neither is an animal that you would like to encounter on a trip, yet the bear has been chosen by the market as the animal that best represents fear: The term “bear market” refers to a situation in which the values of stocks across a number of different indexes are down by a threshold that varies depending on the index, but is normally at least 20%.

Both rising and falling markets are inevitable, with falling markets often heralding the beginning of more significant economic trends. Bull markets are always followed by bear markets and vice versa. To put it another way, a bull market almost always signals that investors are optimistic, which is a sign of economic expansion. A bear market is an indication that investors are cutting down, which suggests that the economy may also cut back.

The good news is that the typical bull market lasts for a far longer period of time than the typical bad market, which is why investing in stocks may help you increase your wealth over the course of the long run.

On June 13, 2022, a bear market was officially established for the S&P 500, which is comprised of around 500 of the major equities in the United States. It has dropped by more than 21% so far this year.

However, when dividends are reinvested and inflation is taken into account, the index has historically produced a return of around seven percent per year on average. If you had invested $1,000 in the stock market 30 years ago, you would have around $7,600 now. (The investing calculator on NerdWallet may help you investigate this topic in further detail.)


Stock market crash vs. correction

A correction in the stock market takes place if the market as a whole falls by more than 10%. A crash in the stock market refers to an abrupt and very sharp drop in stock prices, such as the one that occurred in early 2020, around the time that the COVID-19 pandemic started.

Although collapses are often the first sign of a bear market, keep in mind the following, which was discussed earlier: Because bull markets often last for a longer period of time than bear markets do, the value of stock markets typically increases over the course of time. By August of that year 2020, the market had already begun breaking previous records for highs.

It is helpful to shift your attention to the long term when you are anxious about an impending crash. When the stock market is falling, it can be challenging to watch the value of your portfolio decrease in real-time while doing nothing to reverse the trend. On the other hand, if you are planning to hold onto your investments for a very long time, doing nothing is often the greatest strategy.

Why? Because if you sell assets during a bear market, you are guaranteeing that you will incur more losses. If you want to get back into the market when things are looking up, you should know that you will most likely have to pay more for the privilege and give up some or all of the profits from the market’s return.


The importance of diversification

As an investor, you just can’t steer clear of downturn markets. The danger that comes from having an investment portfolio that is not diversified is something that you can prevent.

Your investment portfolio will be better prepared to weather the inevitable downturns in the market if it is diversified. If you put all of your money into one firm, you are gambling on its success, which might be derailed at any moment by a variety of factors, including regulatory problems, ineffective leadership, or an epidemic of E. coli.

Investors diversify their holdings to reduce the impact of company-specific risks by combining multiple types of stocks into a single portfolio. This helps to offset the inevitability of experiencing losses while also removing the possibility that the tainted beef of a single company will wipe out the entire portfolio.

However, in order to construct a diversified portfolio consisting of individual equities, a significant amount of time, patience, and study is required. The alternative is either an exchange-traded fund, a mutual fund, or an index fund, all of which were previously stated. Because they include a variety of assets, this ensures that your portfolio is automatically diversified. For instance, the goal of an S&P 500 index fund would be to replicate the performance of the S&P 500 by investing in the same 500 firms that are included in that index.


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