What is the Stock Market? Everything You Need to Know about Stock Market Trading
Dec 17 2024
Trading stocks is one of the most popular investment avenues and the stock market is a central platform for buying and selling shares in public companies using a variety of different stock exchanges.
Shares represent partial ownership in a company and the stock market is a way for public companies to fund their businesses by offering investors ownership interest in their chosen companies. Companies list their shares on the stock exchange and raise capital by offering investors the opportunity to buy ownership stakes.
The stock market includes thousands of publicly traded companies, providing investors and companies with a regulated marketplace for trading.
With the option to take dividend income as well as benefit from any appreciation in the value of the shares and capital gains, people choose to invest in stocks with the aim to grow their wealth over time.
How Does the Stock Market Work?
When investors buy shares, they’re essentially buying small parts or portions of a company. These shares are traded on exchanges, with some of the most commonly known exchanges including the NYSE (the New York Stock Exchange), NASDAQ, and the LSE(London Stock Exchange).
Stock value is heavily dependent on a number of factors which means prices may fluctuate significantly. Some of the most significant factors include supply and demand, investor sentiment, company performance, economic factors and wider market activity.
There are a number of participants that play a key role in stock market logistics.
First, we have institutional investors. These are companies or organisations, such as hedge funds or mutual funds, who invest money – typically in large quantities - on behalf of clients or members.
Due to their strong financial standing and the large trades that they make, institutional investors typically enjoy less regulatory oversight, lower fees and other preferential treatment from brokerages. They have the power and resources to trade large blocks of shares and their trades can have a significant impact on overall stock market movement.
Retail investors are another key component of the stock market. These are individual investors who invest their own money on their own behalf, usually via a brokerage firm. This may be to accumulate wealth in a more general sense; it may also be to fulfill a specific financial goal such as buying a house or paying off your mortgage.
The final piece of the stock market puzzle are market makers. They buy and sell securities on their own account, quoting both a bid price (what they're willing to pay) and an ask price (what they're willing to sell for). They subsequently make money from the difference between the two prices.
This activity helps to keep the market moving by avoiding the need for buyers to wait for a seller. It also provides liquidity whilst supporting investors in trading quickly and at a fair price to optimize market confidence.
Understanding the role of orders is also important for stock market traders. Depending on the investment style, either market orders or limit orders will work best.
A market order is a straightforward order to buy or sell a set number of shares at the market price – the order is placed and traders will get the next available price. As the stock markets move so quickly and can be volatile, it’s important to note that the last traded price is not necessarily the one you will get. A good investment strategy will consider this fact and give you safe space to buy or sell at a slightly different price than expected.
In contrast, a limit order is a speculative-led order that specifies the maximum or minimum price you are willing to buy or sell in the future. The trade is then executed if and when the price reaches the pre-determined level. It’s crucial to note that there is no guarantee that the order will place at all if the price does not reach the desired level.
Getting Started with Stock Market Investing for Beginners
Understanding the Basics
Understanding key jargon associated with stock market trading is essential from the outset of your trading journey. This will help you to quickly gain familiarity and get comfortable with the trading environment for the most streamlined experience.
While you may hear the terms “stocks” and “shares” used interchangeably, there are some key differences. Stocks is a broader term for the asset, referring to ownership in one or more companies, while shares are more specific and refer to a unit of ownership in one particular company.
Dividends and portfolios are two further terms that are important to understand. Dividends are a fraction of a company’s profits paid out to shareholders in the form of cash or shares.
These are typically viewed as rewards for investing into a company. Dividend payments vary over time and are not guaranteed but some options can potentially provide a steady income stream.
A stocks portfolio is a collection of stocks that you have chosen to invest in with the view to achieve personal investment objectives such as maximize profits in the short- or long-term. A more general financial portfolio typically includes other types of investment such as commodities, cash and bonds.
The difference between stocks and bonds is that stocks represent fractional ownership of equity in organisations while bonds are debt instruments that act as a type of loan from investors to a company or government.
Stocks generally have both higher risk and return rates while bonds offer a more stable, (usually) more regular type of income, albeit one that is significantly impacted by interest rate changes.
The Concept of Risk
Beginner traders to the stock market should also understand the concept of risk. Building a portfolio also means considering the level of risk that you as an investor are willing and able to take. Risk essentially means that the higher the potential return, the higher the potential risk that investors may experience financial losses.
Risk comes in many forms and a company’s stock prices can drop due to market volatility, poor economic conditions, global events such as economic crises or political instability. Investors may find their stocks exposed to more company-specific risks, such as poor internal performance, competitive pressures, or financial difficulties.
Diversification can be an effective way to reduce risk. This essentially means building a portfolio comprising a range of investments from different sectors. You may include a range of asset types, classes and markets to incorporate various levels of risk and achieve a healthy balance.
By establishing a stable base using lower-risk investments such as bonds or cash, you can then build up your portfolio with higher-risk, higher-reward options such as stocks to your preferred risk level.
Risk levels are typically classed as low, medium and high, with anything from 15-70% of higher-risk options making up the total collection.
Diversifying can also mean choosing some longer-term investments and some shorter-term options. Investors who choose to take a longer-term approach to their stock market investing can access a number of benefits.
Typically considered to be an approach that sees assets held for three years or more, these longer-term stocks tend to outperform shorter-term options when timing the market.
They could therefore represent an effective way to build long-term wealth. Longer-term investing also cuts costs and reduces the impact of market volatility and short-term dips on your portfolio.
Choosing a Brokerage Account
A brokerage account is essentially an investment account that allows individuals to buy and sell assets such as stocks or bonds. Individuals can trade on their own terms, choosing what to buy, when to buy and when to sell in line with investment goals.
There are a range of broker types available to suit every individual investor, including those ideally suited to beginner traders. Options including full-service, discount and online brokerages with various benefits available.
Key features to look out for include low fees, user-friendly trading platforms, strong security, solid broker reputation, good educational resources, and responsive customer support. Some brokers such as STIC Cashback also offer cashback bonuses on your trades for an additional boost to profits.
Opening a Stock Market Account
Opening a brokerage account with a stock trading platform is the first real step of your trading journey. Account setup can typically be completed online in just 15 minutes, making it easily accessible to new investors.
Setup usually involves a series of standard requirements such as submitting personal information including name, address and employment details. Some brokerage accounts also require an upfront deposit and you will always need to fund your account before you start buying investments.
Learning to Invest in Stock Exchange Market
Trading stocks and learning to invest in the stock exchange market is a journey that keeps on going. The best traders are those that continually invest in their learning using the wide range of educational resources available. Whether you like to learn through books or online tutorials, there is a great range of support at your fingertips.
Taking the time to educate yourself will help all beginners gain confidence and trade with more knowledge for better outcomes.
Learning through demo accounts is also a great way to get to grips with how it all works and practice trading without any pressure or the risk of losing money.
Stock Market Investment Strategies for Beginners
There are a number of beginner-friendly strategies that you can choose from to help you get started with investing thoughtfully and pave the way for a positive onward journey.
All of these strategies are simple and conservative ways of trading stocks because there is no need to use complex or high-risk tactics to see potential growth.
Instead, these approaches support beginners in taking a sensible, paced journey for best outcomes.
- Buy-and-hold
This is a passive style of investment strategy that involves buying stocks to hold for a long period of time. In this way, investors aim to generate higher returns and maintain their stock position despite market fluctuations.
- Dividend investing
As another popular beginners’ investment strategy, dividend investing focuses on stocks that pay regular dividends. Investors like this style because it is less volatile than trading with non-dividend stocks and provides them with a steady stream of income.
- Dollar-cost averaging
This approach involves investing a fixed amount at regular intervals, regardless of share price. It works to spread out risk, boost your returns without any additional risk and reduce the average cost per share. It’s a fairly hands-off approach ideal for those who would like a low-maintenance style of investing.
Common Challenges for Stock Market Beginners
New investors may face a number of hurdles, many of which become easier to deal with over time and experience.
The risk of emotion-led investing is one key challenge. Avoiding the urge to make impulsive decisions based on emotions is tough but it’s all part of learning how to adopt a disciplined approach to your investment journey. One of the most common beginner mistakes in this aspect is investing too much in a single stock.
Market volatility is another key challenge. Many beginners will make the mistake of trying to “time the market” which is especially tricky when you are not experienced in handling the ups and downs of trading in the financial markets.
The good news is that every investor can learn to handle these challenges by being patient and setting realistic goals. Maintaining a long-term perspective and managing expectations are other key strategies that beginners can adopt to manage these challenges effectively.
Staying informed is also important, and investing time in your financial education – knowledge, after all, truly is power. Experience, too, is invaluable. The stock market is complex but it offers great benefits - once you learn how to navigate it.
Beginner-Friendly Stockbrokers: Our Picks
There are a range of stockbrokers that we recommend for new traders due to their range of beginner-friendly features.
One popular stockbroker is Land Prime, who offer key benefits including demo account option, low minimum deposit and copy trading, the latter of which supports beginners by helping them learn from the best.
Beginners also recommend FXGT for their low fees, range of account types to support the evolving trading journey, low minimum deposit and wealth of educational resources including a comprehensive online resource center.
We also find FinPros is a good fit for beginners, thanks to an easy-to-navigate interface, extensive range of educational resources and customer-first business approach.
All three of these brokers also offer trading via mobile apps plus the added benefit of cashback bonuses through the STIC Cashback program.
Other Guides and Resources
We always advise traders to keep learning and developing their knowledge in order to deepen their understanding of the stock markets and gain the most from their trades. We have compiled a number of guides to support beginner traders and especially recommend CFD Trading for Beginners and the Beginner's Guide to Forex Trading to support your stock market education.
FAQs about Investing in the Stock Market
How do I choose which stocks I want to buy?
You might choose companies based on personal interest (e.g. investing into sports or music companies), bigger names (e.g. Apple) or smaller organisations. It’s all based on your personal risk tolerance, financial ambitions and goals.
Regardless of why you choose a company, it’s essential to fully research them before making the decision to invest including their history, financial details and reputation.
How do I buy stocks?
Put simply, you need to set up a brokerage account and invest in the services of a good stockbroker. There are plenty of options available for beginners, and you will benefit from expert guidance throughout the process.
The best brokers are those with an accessible, easy-to-use website, good educational resources and low fees, as well as added plus points such as cashback bonuses and low minimum deposit.
What are the benefits of trading stocks?
Trading stocks is an extremely flexible way to invest with many potential benefits. Depending on your chosen strategy, style and shares, you may benefit from a regular passive income stream, strong profits in the long-term and higher returns than other investments such as cash. Stocks are also good for portfolio diversification and offer good liquidity.