Basics of the Stock Market: Your Ultimate Guide
The stock market is a device for transferring money from the impatient to the patient
— WARREN BUFFETT
From the outside, the stocks, forex & Cryptocurrency market seems to be a mysterious world where numbers and patterns are moving up and down on the screen.
A place where fortunes are won and lost every day, a place where the world's biggest auction takes place, a place where billions of dollars trade hands every day, and there are many more buzzwords about the stock market.
But look a little closer, and you will find success along with failure, murder, and suicide (sorry to say but it's true). You'll find one who has made billions of dollars and another who lost everything.
Knowing the bitter truth about the stock market, a question comes to our mind why the financial market is unpredictable?
The answer is financial market becomes a place for corporate scandals, scams, and schemes, and insider trading (we don't want to discourage you but this is the truth). But it is also the place where dreams can come true.
Stocks and their types
In simple words, a stock market is a place for buying or selling stocks
Need Of Stock Market
- Stock market acts as an indicator of the economic cycle.
- Companies can raise capital through the stock market.
- Stock market creates jobs (hundreds of thousands of people are engaged with the financial market).
- Provides an extra source of income.
- Individual can increase their personal wealth.
- Through the stock market one can minimize capital risk by some strategies such as hedging or diversification.
- One can beat the effects of inflation through the stock market
Financial Instruments that are traded in the stock market
The financial instrument is assets that can be traded, not all financial instruments are traded on the stock market like 'cheque' is also a financial instrument but not traded on the stock market.
There are mainly four types of financial instruments that are traded on the stock market which are as follows:
- Bonds
- Stocks/Shares
- Derivatives
- Mutual Funds
Types of stocks
The major types of stocks that you should know as a trader/ investor- Common stocks
- Preferred stocks
- Value stocks
- IPO stocks
- Growth stocks
- Income stocks
- Domestic stock
- Small-cap stocks
- Mid-cap stocks
- Large-cap stocks
- Dividend stocks
- Non-Dividend stocks
- Blue chip stocks
- Penny stocks
Diversifying your portfolio and not limiting yourself to just one sort of financial instrument is the greatest way to invest in the stock market.
- Common stocks: Common stock is the main class of stock. When people talk about stock, it generally mean common stock.
- Preferred stocks: A preferred shareholder gets a predetermined, fixed amount of dividend that's paid on a regular schedule.
- Value stocks: Value stocks are stocks of companies that are considered undervalued by the market.
- IPO stocks: IPO stands for Initial Public Offering, which is a private company's first public offering of stock. Stocks of companies that have recently gone public through an IPO are known as IPO stocks.
- Growth stocks: Growth stocks are shares of companies that are expected to grow rapidly in the future.
- Income stocks: Income stocks are those that pay out regular dividends to their shareholders. Income stocks and growth stocks are frequently contrasted.
- Domestic stocks: Domestic companies are those that have their headquarters and conduct business in a specific nation.
- Small-cap stocks: A small-cap company has a market capitalization of less than $2 billion.
- Mid-cap stocks: A mid-cap company has a market capitalization of $2 billion to $10 billion.
- Large-cap stocks: A large-cap company has a market capitalization of more than $10 billion.
- Dividend stocks: Dividend stocks are stocks that pay a portion of their earnings to shareholders in the form of dividends.
- Non-Dividend stocks: Stocks of companies that don't regularly distribute dividends to their shareholders are known as non-dividend stocks. Instead, these businesses might decide to reinvest their profits to support development and growth.
- Blue chip stock: Blue chip stocks are those of large, well-established companies with a long history of consistent earnings, dividend payments, and a strong reputation.
- Penny stocks: Penny stocks are company stocks that trade at a low price per share, typically less than $5.
