What is Stock Market? Read Our Complete Guide | AvaTrade (2022)

What is Stock Market? Read Our Complete Guide | AvaTrade (1)

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What is the ‘Stock Market’?

Also known as the equities market, a stock market is a place where shares of publicly owned companies can be bought and sold. Publicly traded shares can be traded either through centralised exchanges or OTC (over-the-counter). The stock market is essentially a free economy market where companies can access capital by offering part ownership to interested investors who are basically outsiders. This is beneficial for both investors and the underlying companies.

For investors, the stock market offers a unique opportunity to be part of an established or already running business and to reap any of their resulting rewards without the high risk of investing in a new, unproven business, that has to contend with the associated start-up costs, overheads and other running costs and management. For the underlying companies, the stock market allows them to access a convenient source of capital to fund their growth or expansion activities. This creates a win-win situation for both parties.

But like any investment activity, there are also risks involved. The amount of risk a trader incurs depends entirely on the price of the stock held. If the price of a stock increases, a trader will earn profits if they sell their shares. On the other hand, losses will be realised if the stock is sold at a lower price than it was bought at. The extent of profits or losses realised will depend on the amount of stock that was initially bought, and of course, how much the price of the stock rises or falls.

How is the Stock Market Broken Down?

There are various segments of the stock market to consider when entering into a purchase or interest in the shares of a particular public company. The stock market is divided into the primary market and the secondary market.

(Video) How does the stock market work? - Oliver Elfenbaum

Primary Market

The primary market is when new securities are created or issued, and they then become available for trading by individuals and institutions. Here, securities are directly issued by the company that seeks to raise capital to fund its long-term goals and ambitions. The most common way companies interact in the primary market is through an IPO (Initial Public Offering) where stocks are listed for the first time to trade in the market. Companies can also engage in the primary market through a Rights Issue (raising money through existing shareholders) or a Preferential Allotment (issuing shares to a few shareholders at a predetermined price).

Secondary Market

After the initial offering in the primary market, all subsequent trading of securities takes place in the secondary market between investors, with the underlying company not involved. Trades are facilitated by stock exchanges or by brokers who act as intermediaries.

OTC Market

Also known as trading off-exchange, trading OTC (over-the-counter) is an option for investors to buy and sell stocks in a decentralised market. Trades are conducted between two parties via a dealer network, with a centralised exchange not involved. Typically, the OTC market is for stocks or stock prices not listed on a stock exchange. Decentralised is where a transaction of buying or selling will take place between two parties, such as the trader and the broker. There are generally no rigid conditions in an OTC market, with trading being very flexible with as few limitations as possible.

There are many reasons a company would want to list on an exchange. Raising capital is the primary motivation, but companies that get listed attain many more benefits. Going public gives a company massive publicity that can open up even more business opportunities. A company can gain the attention of diversified pools of investors ranging from institutional investors to foreign investors. This naturally leads to increased brand equity as well. There is also the prestige of being a company listed on a top stock exchange, as well as the ability to attract top talent by offering sought-after perks, such as stock options.

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Process of Stock Market Listing

The process of listing a company differs from exchange to exchange. But it will typically start with filing a registration with a relevant regulatory agency, such as the Securities Exchange Commission (SEC) in the US. A company will do this if it meets the conditions of the underlying stock exchange they wish to get listed on, such as the NYSE or NASDAQ. The next step will be to employ an underwriter, which is an investment bank or a major financial services company, to manage the sale of shares.

An underwriter serves as a bridge that connects the underlying company to investors as well as a risk assessor. It is the underwriter that will be responsible for drafting a prospectus, a document that will attempt to entice investors to invest in the underlying company. Listing on a stock market also comes with some downsides. To start with, the process of stock market listing is costly, time-consuming and labour intensive.

As well, going public literally means that a company becomes public property. There is increased scrutiny and demands for accountability both by the public and the relevant capital markets regulatory agency. For founders and other early investors, there is the risk of undervaluation as well as share dilution. It is the underwriter(s) that determines the IPO price by taking into account factors such as demand for the stock, growth prospects, the company business model and past industry equivalents.

After a company goes public, the share price is determined by market forces of demand and supply. There are different and varied factors that influence stock prices including fundamental factors, such as revenue and earnings per share; technical factors, such as inflation, industry performance, liquidity and trends; and sentimental factors such as investor speculation activity as well as reaction to political and economic news releases and events.

The Stock Exchange

Also known as the bourse, the stock exchange is a place where securities, such as stocks are bought and sold. It is also a place that provides facilities for issuing and redeeming financial instruments, including income and dividend payments.In addition to stocks, stock exchanges list other assets, such as bonds, unit trusts, derivatives, as well as pooled investment products such as exchange-traded fundsandstock market indices.

(Video) How to Read Stocks for Dummies Tutorial - Investing 101

The main Stock Exchanges

In most cases, companies will use their local stock exchanges as a platform to go public. Here are some of the major stock exchanges around the world, whose assets are also available for trading at AvaTrade.

Main Stock Exchanges
Local Stock ExchangeRegionPublic Listing
New York Stock ExchangeNew York, United States of America
  • Dow Jones Industrial Average
NASDAQNew York, United States of America
  • Nasdaq 100
London Stock ExchangeLondon, England
  • UK100
  • FTSE 250 Index
  • FTSE 350 Index
  • FTSE SmallCap Index
  • FTSE All-Share Index
Borsa ItalianaMilan, Italy
  • ITALY_40
  • FTSE Italia All-Share
  • FTSE Italia Mid Cap
  • FTSE Italia Small Cap
  • FTSE AIM Italia
Japan Exchange GroupTokyo, Japan
  • Nikkei 225
Hong KongCentral, Hong Kong
  • Hang Seng Index
Frankfurt ExchangeFrankfurt,Hesse,Germany
  • DAX
  • DAXplus
  • CDAX
  • DivDAX
  • LDAX
  • EuroStoxx 50
  • MDAX
Shanghai stock exchangeShanghai, China
  • SSE 50 Index
  • SSE 180 Index
  • SSE 380 Index
  • SSE Composite Index
EuronextAmsterdam, Netherlands
  • CAC 40
  • PSI 20

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Investing in Stocks

There are two fundamental strategies when investing in stocks: value investing and growth investing. The two strategies complement each other and applying them to individual stocks can help investors maintain a well-balanced portfolio.

Value Investing

This is a strategy that aims to identify stocks that are undervalued in the market. Value investors actively seek companies that they believe are underpriced in the market, with the hope that sooner or later they will be priced accordingly.These can be stocks of companies priced below similar companies in the same industry or companies whose business models carry less risk in their operating markets. Value stocks are considered a bargain as well as relatively safe for investors over the long run.

Growth Investing

Growth investing involves identifying stocks of companies that have performed admirably in the recent past and they are expected to grow faster than other companies. Growth can be in terms of revenue, cash flow, or profit.It is important to note that this growth is expected, but not guaranteed. Growth stocks have a higher ceiling in terms of price appreciation, but they are naturally riskier and more volatile.

Price-Earnings Ratio

Better known as the P/E Ratio, this ratio is used to value a company by measuring its current share price relative to its earnings per share.

Here is how the price-earnings ratio is calculated:

By taking the stock price of the company and dividing it by is earnings per share (EPS) = market value per share. The P/E ratio is a dollar amount that a trader can expect to invest in a company in order to receive one dollar of that company’s earnings.

Dividend-Paying Stock

Dividend stocks are companies that pay out regular dividends to shareholders. Dividends are a share of profits distributed directly to shareholders. Companies that pay out dividends regularly to investors are typically more established with proven and sustainable business models. Dividends are usually paid out quarterly, which means that they can be a regular source of income for investors.

Shares Trading

Swing Trading

Swing trading is a popular style for trading stocks. A swing trader attempts to earn a profit from a price movement that is expected to happen in the short to medium term.Due to its short-term nature, swing traders typically utilise technical analysis methods to pick out ideal entry and exit price points in the market.

(Video) Stock Market for Beginners | Step by Step Guide

Day Trading

Day trading is a trading style where financial assets, such as stocks, commodities, indices or currencies, are bought and sold within the same day.The difference between swing trading and day trading is simply the holding period. When day trading, all trade positions are liquidated strictly on the same day. No trade positions are left overnight.Naturally, day trading carries a higher level of risk and can result in higher trading costs due to the amount of trading activity done within a short period.

Trading Stocks CFDs with AvaTrade

AvaTrade has simplified stock trading for investors. There are numerous stocks drawn from several global exchanges available for trading. When trading stock CFDs with AvaTrade, you are trading contracts for differences, which means that you get the chance to trade the price movement of underlying stocks without necessarily owning them.

AvaTrade offers leveraged trading of up to on stocks and traders can enhance their trading activity by utilising handy trading tools and resources such as the Economic Calendar, Trading Central, AvaProtect™, and AvaSocial.AvaTrade is also a globally regulated broker that provides top trading services through multiple advanced trading platforms.

Additionally, AvaTrade offers multilingual support to ensure that traders have the necessary support and assistance for their trading activities.

Stock Market Main FAQs

  • What is stock market volatility?

    All investing forms come with risks. Volatility is one of the risks of trading stocks. Volatility is characterised by choppy price swings and can particularly be witnessed in individual stocks during news or events such as an earnings release. Volatility can increase the risk of losses but it typically evens out over time. This means that a cure for volatility is to hold stocks over a longer period and to ride both the ups and downs in the market.

  • Where is the stock market located?

    Different markets are located in different places, and in some instances, there is no physical location for the market or index. For example, the NYSE is physically located in New York City at 11 Wall Street, and you can actually go there and see the floor traders. By contrast, the Nasdaq is fully electronic, and while it has its headquarters in New York City, there is no trading floor where you can go to see the open outcry form of trading. Nearly every country in the world has one or more stock markets, and most have physical locations but have been increasingly migrating towards electronic trade.

    (Video) The Only Technical Analysis Video You Will Ever Need... (Full Course: Beginner To Advanced)
  • How are prices set at the stock market?

    Most stock markets work through an auction process, with buyers placing bids for the price they are willing to pay for a stock, and sellers setting an ask price for how much they are willing to sell for. When the two prices meet, a trade is conducted, and shares can exchange hands. In the past all of these trades were made on stock market floors or pits, using an open outcry system where the market makers would yell, or cry out the prices at which shares could be bought or sold. That has evolved into an electronic auction system, which is good since stock markets today consist of millions of individuals, all of whom have their own ideas of what a stock is worth.

    (Video) Stock Market Terminology for Dummies

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How can I learn to read the stock market? ›

Key concepts when learning how to read a stock chart
  1. Identify the trendline. This is that blue line you see every time you hear about a stock — it's either going up or down right? ...
  2. Look for lines of support and resistance. ...
  3. Know when dividends and stock splits occur. ...
  4. Understand historic trading volumes.

What is stock market full details? ›

Stock markets are venues where buyers and sellers meet to exchange equity shares of public corporations. Stock markets are components of a free-market economy because they enable democratized access to investor trading and exchange of capital. Stock markets create efficient price discovery and efficient dealing.

How do you read a stock market summary? ›

Open, high, low and previous close. The open is the first price at which a stock trades during regular market hours, while high and low reflect the highest and lowest prices the stock reaches during those hours, respectively. Previous close is the closing price of the previous trading day.

What are the 4 levels of stock? ›

There are four phases of the stock cycle: accumulation; markup; distribution; and markdown. The stock cycle is based on perceived cash flows into and out of securities by large financial institutions.

Can I learn stock market myself? ›

Read books: A sure-shot way to educate yourself on any topic is by reading books written on it. Similarly, you can glean a lot of knowledge about the stock market by reading books about the different instruments, investment strategies, and even memoirs of successful investors.

Can I teach myself stock market? ›

Stock market is not a difficult subject to understand as you may think and anyone can learn how to trade stocks. There are many options available through which you can learn stock market basics. With sincere and persistent efforts, you can learn stock market.

Who controls the stock market? ›

The stock market is regulated by the U.S. Securities and Exchange Commission, and the SEC's mission is to “protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation." Historically, stock trades likely took place in a physical marketplace.

How do I start trading stocks? ›

Four steps to start online trading in India
  1. Find a stockbroker. The first step will be to find an online stockbroker. ...
  2. Open demat and trading account. ...
  3. Login to your demat and trading account and add money. ...
  4. View stock details and start trading.

What is the 5% rule in stocks? ›

In investment, the five percent rule is a philosophy that says an investor should not allocate more than five percent of their portfolio funds into one security or investment. The rule also referred to as FINRA 5% policy, applies to transactions like riskless transactions and proceed sales.

What are the 2 types of stock? ›

There are two main types of stocks: common stock and preferred stock.
  • Common Stock. Common stock is, well, common. ...
  • Preferred Stock. Preferred stock represents some degree of ownership in a company but usually doesn't come with the same voting rights. ...
  • Different Classes of Stock.

What are the 7 types of stocks? ›

Here are the major types of stocks you should know.
  • Common stock.
  • Preferred stock.
  • Large-cap stocks.
  • Mid-cap stocks.
  • Small-cap stocks.
  • Domestic stock.
  • International stocks.
  • Growth stocks.

Can I learn stock in 6 months? ›

For learning swing trading, it takes at least 6 months and for intraday trading, at least a year. So don't get discouraged by the time required because this is a skill that will make you money for the rest of your life. There is no retirement in trading as you can trade from your home even when you're 80.

How can I learn stocks fast? ›

Conversely, if there are more sellers than buyers (too much supply), the price will fall.
  1. 10 great ways to learn stock trading as a beginner. ...
  2. Open a stockbroker account. ...
  3. Read books. ...
  4. Read articles. ...
  5. Find a mentor or a friend to learn with. ...
  6. Study successful investors. ...
  7. Read and casually follow the stock market.

Which course is best for stock market? ›

  • Program in Wealth Management.
  • Certified Financial Goal Planner.
  • Advance Technical Analysis.
  • Advance Equity Research And Valuation Course.
  • Advanced Technicals & Options Trading Strategies.
  • Advanced Equity Research & Technical Analysis.
  • Advance Future and Options.
  • Index Trading Strategies Course.
15 Jul 2022

Can I learn stock market for free? ›

Take trading classes online free from IFMC which is India's biggest stock market institute in India to offer paid and free stock market courses. Comprising 4 courses, the specialization covers technical analysis, fundamental analysis, intraday trading, and application of trading strategies.

How do I begin to invest? ›

How to Start Investing: A Guide for Beginners
  1. Start investing as early as possible.
  2. Decide how much to invest.
  3. Open an investment account.
  4. Pick an investment strategy.
  5. Understand your investment options.
23 Sept 2022

How do I start day trading? ›

How to start day trading
  1. Learn the market. ...
  2. Develop a strategy. ...
  3. Set up a demo account. ...
  4. Set goals and know your limits. ...
  5. Find out the tax implications. ...
  6. Choose a broker. ...
  7. Decide what you will be trading. ...
  8. Get recommendations.
13 Jun 2022

Why do people buy stocks? ›

Stocks offer investors the greatest potential for growth (capital appreciation) over the long haul. Investors willing to stick with stocks over long periods of time, say 15 years, generally have been rewarded with strong, positive returns.

What are the 4 trading markets? ›

Investors can make trades in various markets, including the stock market, foreign exchange market, and options market. Many markets are available to anyone with a simple internet connection. Day traders commonly choose the forex market for its low barriers to entry as well as exchange-traded funds.

Who owns the most stock in the world? ›

The natural stock pick held by the world's wealthiest person is Microsoft (NASDAQ:MSFT), the giant tech company Bill Gates co-founded with Paul Allen in 1975. Gates still owns almost 103 million shares of the company worth $15.4 billion.

Which is best share to buy in 2022? ›

List of Top 5 Shares to Buy in 2022
Company nameCurrent share price
Reliance Industries Ltd₹2433
Metropolis Healthcare Ltd₹1567
Balaji Amines Ltd₹3236
Infosys Ltd₹1451
1 more row
25 Oct 2022

How do I pick my first stock? ›

  1. Do not fall prey to the trend of investing in companies you don't know anything of, with products you don't have any idea about. ...
  2. Research about the companies you know. ...
  3. Always start small when you begin investing.

What is the safest stock? ›

Despite what you might read on social media, stocks that never go down don't exist. If you want a completely safe investment with no chance you'll lose money, Treasury securities or certificates of deposit (CDs) may be your best bet.

Is online trading safe? ›

Therefore, there's very little chance of a trade being fraudulent. Right from the time you buy a stock to the time the trade gets settled and the shares are delivered to your demat account, every single process is automated and monitored regularly.

How can I invest and make money daily? ›

Passive Ways to Invest and Make Money Daily
  1. Fundrise. If you've been interested in investing in real estate, Fundrise may be for you. ...
  2. Acorns. If you are interested in automatic investing options, Acorns has many to consider. ...
  3. Cash App. ...
  4. Wealthsimple. ...
  5. M1 Finance. ...
  6. Crowdstreet. ...
  7. Roofstock. ...
  8. Robinhood.
1 Nov 2022

What is the 80% rule stocks? ›

In investing, the 80-20 rule generally holds that 20% of the holdings in a portfolio are responsible for 80% of the portfolio's growth. On the flip side, 20% of a portfolio's holdings could be responsible for 80% of its losses.

What is the 50% rule in trading? ›

The fifty percent principle is a rule of thumb that anticipates the size of a technical correction. The fifty percent principle states that when a stock or other asset begins to fall after a period of rapid gains, it will lose at least 50% of its most recent gains before the price begins advancing again.

What is the 2 day rule in stocks? ›

For most stock trades, settlement occurs two business days after the day the order executes, or T+2 (trade date plus two days). For example, if you were to execute an order on Monday, it would typically settle on Wednesday.

What type of stock is Apple? ›

Common Stock (AAPL)

How many shares are in a stock? ›

Typically a startup company has 10,000,000 authorized shares of Common Stock, but as the company grows, it may increase the total number of shares as it issues shares to investors and employees. The number also changes often, which makes it hard to get an exact count. Shares, stocks, and equity are all the same thing.

What is the price of a stock called? ›

Current price is also known as market value. It is the price at which a share of stock or any other security last traded.

What are the 4 types of investments? ›

There are four main investment types, or asset classes, that you can choose from, each with distinct characteristics, risks and benefits.
  • Growth investments. ...
  • Shares. ...
  • Property. ...
  • Defensive investments. ...
  • Cash. ...
  • Fixed interest.

Is stock same as share? ›

A share is a financial instrument that represents the part ownership of a company. A stock is a financial instrument that represents part ownership in one or more organisations. The value of two different shares of a company can be equal to each other.

How many days it will take to learn about stock market? ›

For learning swing trading, it takes at least 6 months and for intraday trading, at least a year. So don't get discouraged by the time required because this is a skill that will make you money for the rest of your life.

What is the best source to learn stock market? ›

The 9 Best Online Stock Trading Classes of 2022
  • Best Overall: Investors Underground.
  • Best for Beginners: Udemy.
  • Best Value: Bullish Bears.
  • Best Free Option: TD Ameritrade.
  • Best for Technical Analysis: Skillshare.
  • Best for Day Traders: Bear Bull Traders.
  • Best for Live Training: Bulls on Wall Street.

How do you read stocks and shares for beginners? ›

A share is a small unit of the value of a company

Those shares can, and do, go up and down in value for various reasons. Companies issue shares to raise money and investors (that's you) buy shares in businesses because they believe the company will do well and they want to 'share' in its success.

Is stock hard to learn? ›

As it turns out, investing isn't as hard — or complex — as it might seem. That's because there are plenty of tools available to help you. One of the best is stock mutual funds, which are an easy and low-cost way for beginners to invest in the stock market.

Is stock market a good career? ›

A career in the stock market offers lucrative opportunities to both investors and traders. This article explores how to make a career in the stock market the right way. Today, nearly every job description dealing with the market is very competitive to comprehend and sustain.

Where can I study for trading? ›

437 results for "trading"
  • Free. Yale University. ...
  • Interactive Brokers. Practical Guide to Trading. ...
  • Indian School of Business. Trading Strategies in Emerging Markets. ...
  • Google Cloud. Machine Learning for Trading. ...
  • Free. Princeton University. ...
  • Free. ...
  • University of Geneva. ...
  • EDHEC Business School.

How do I study stock before investing? ›

How to do Fundamental Analysis of Stocks:
  1. Understand the company. It is very important that you understand the company in which you intend to invest. ...
  2. Study the financial reports of the company. ...
  3. Check the debt. ...
  4. Find the company's competitors. ...
  5. Analyse the future prospects. ...
  6. Review all the aspects time to time.

What should I study if I like stocks? ›

Generally speaking, the six college degrees suitable for investing and stock trading are:
  • Finance.
  • Economics.
  • Business Administration.
  • Computer Science.
  • Statistics.
  • Physics, Engineering, Applied Mathematics.

How do I invest my money? ›

These options include:
  1. The Stock Market. The most common and arguably most beneficial place for an investor to put their money is into the stock market. ...
  2. Investment Bonds. Investment bonds are one of the lesser understood types of investments. ...
  3. Mutual Funds. ...
  4. Physical Commodities. ...
  5. Savings Accounts.


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