Stock Market 101: 4 Basics That Every Investor Should Know

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Overview:

1. What is the Stock Market?

2. There Must be Winners and Losers.

3. What Makes Stock Prices Go Up and Down?

4. When is the Best Time to Buy and Sell?

What is the Stock Market?

The stock market is a complex system where shares of publicly-traded companies are issued, bought, and sold. Many people compare the Stock Market to gambling, however, this is not valid. When you gamble you either win or lose all of your money. So if you gamble x dollars and win you may win 2x but you can also lose x dollars and lose all of your money. The Stock Market does not work this way. In the stock market you will almost never lose x dollars, you may lose y dollars which is a fraction of the x dollars. You will almost never lose all of your money.

There Must be Winners and Losers.

It is no secret that the stock market is made of millions of traders with varying views on the market. So when someone sells the stock, there has to be someone willing to buy it. Both traders cannot be correct so the stock market is adversarial. This basically means that for every winner, there is also a loser. In short, one investor will profit and the other will suffer loss. For this reason, you should be aware of your situation before making a transaction.

What Makes Stock Prices Go Up and Down?

There are many factors that affect the prices of stocks. These factors include natural disasters, supply-demand, politics, and the media. When a natural disaster hits, many stock prices will dive because corporations and the companies that issue the stocks may be suffering. A recent example of this is the Covid-19 Situation. The supply-demand chain also affects stock prices a great amount. When there is more demand for the stock than supply, the price will rocket up, but when the supply is higher than the demand, the price will plummet. Politics make an extensive impact on the stock market. When a new government takes over or the new president gets elected, stocks will usually tend to be on the rise. Furthermore, when foreign policy changes occur, the stock prices may change substantially. A recent example of this is the trade war between the United States of America and China. And lastly, the media greatly influences people's lives, which in turn influences the market.

When is the Best Time to Buy and Sell?

A general rule of thumb I like to follow is to buy when others are pessimistic and sell when others are optimistic. When buying, remember that the prospect of a high return is greater if you buy after its price has fallen rather than after it has risen. However, with that being said you, successful investors still proceed with caution. When looking to buy stock ask yourself: Why is the price down so much? What new event has occurred within the company? Will I make a good profit from buying this? What is the general talk about this company? Did other stocks in the same industry experience a decline? If so, was it as severe? Did the entire stock market fall? If the broader market or other stocks in the same industry/sector performed relatively well, there may be a problem specific to the company.

Key Points:

1) The stock market is a complex system where shares of publicly-traded companies are issued, bought, and sold.

2) For every winner, there is also a loser. One investor will profit and the other will suffer loss.

3) There are many factors that affect the prices of stocks. These factors include natural disasters, supply-demand, politics, and the media.

4) Buy when others are pessimistic and sell when others are optimistic. When buying, remember that the prospect of a high return is greater if you buy after its price has fallen rather than after it has risen.