What are Stocks?

Simply put, a stock is a fraction of a company. It is a security that represents ownership of a part of a company. This means that the owner of a stock is entitled to a certain proportion of a company’s assets and profits, equal to how much stock they own. Stocks are also known as equity, and units of stock are called shares. Stock owners have shares in the companies in which they own stock, which is why they are called shareholders.

What are Stock Markets?

A stock market is where investors can buy and sell stakes in a company. The stock market is also known as a Securities Exchange because other securities such as bonds and treasuries are traded in it. However, stocks are the most common commodities traded.

Around the world, there are many stock markets. The most popular stock markets are the New York Stock Exchange (NYSE), National Association of Securities Dealers Automation Quotation Exchange (NASDAQ), and the London Stock Exchange. However, there are other stock markets around the world. In Nigeria, we have the Nigerian Stock Exchange (NSE). It has its own rules and is regulated by the government.

How Does the Stock Market Work?

The stock market can be viewed as a regulated safe space where buyers and sellers of stock can negotiate stock prices and trade securities. Usually, companies list their shares on the exchange while investors purchase and sell them among one another. As an individual trading in the stock market, you can buy and sell stock through a broker. Stock brokers are professional middlemen who can trade stock on your behalf.

Most stock exchanges have physical locations, also known as trading floors. But these days, stocks and securities in general are commonly traded digitally through various trading platforms.

How Does the Economy Affect the Stock Market?

There are many factors that affect how the stock market is doing, and whether it’s moving up or down. These include the political climate, social factors, interest rates, trends, and shifts, etc.

Economic Impact

People are generally averse to risk. Hence, if their investments or profits are threatened in the slightest way, their reactions reflect in the market. If the general population feels as if the economy will soon be taking a turn for the worse, they tend to sell stock off. On the flip side, when people are feeling confident and optimistic about the economy, they tend to buy stock, taking more risk for greater reward.

From a high-level approach, when people feel good about the economy, they tend to buy more stock. When things are happening in the world make them feel unsure, they will be more conservative and might gravitate toward lower-risk investments such as bonds and Treasury bills.

Why Stocks Go Up and Down

When we say stocks have gone up or down, we are referring to the price of the stock. There are multiple underlying factors that can affect whether a stock moves up or down. But the most essential, rudimentary concept is the basic law of supply and demand.

Just like any other commodity, when there’s a high demand for a particular stock and few people holding that stock are selling, the price goes up. Conversely, if there’s a low demand with many sellers, the price of a stock is driven down.

Demand Drivers

Factors that drive demand boil down to data and a company’s performance and earnings, but it can also be partly due to speculation. For instance, how investors perceive and feel about the profitability of a company may determine if they are buying or selling its stock. If a company is perceived as having a widely anticipated new product come out, their stock may go up.

Economic Conditions

Companies can also be adversely affected by economic conditions out of their control. For example, the stay-at-home orders in many states related to COVID-19 caused a drop in oil stocks because people not going anywhere caused demand for gas to crash and led to an oversupply of oil. As a result of COVID-19, people took actions to protect their money.

Although there are plenty of reasons for stocks to go up and down on their own, sometimes overall market trends will help push them in one direction or another.

How Do You Invest in the Stock Market?

The stock market isn’t one where you just dive into, even when you have loads of cash to invest. You need to do your due diligence, research, and obtain valuable information that will guide your decisions. You should also understand certain terminologies associated with the stock markets, common events that could drive stocks up or down, etc.

Research and Patience

In the beginning, it might seem like a lot of work to learn and understand, and you may even get discouraged. But, it’s better to take your time to start, rather than rush in and rush out. Investing in the stock market will involve your time, your patience, and tolerance for risk. It is also important to have a financial and investment advisor, even if you’re very confident in your personal knowledge of the market.

Conclusion

Mastering the fundamentals of the stock market is essential for beginner investors looking to build a successful portfolio. By understanding key concepts such as stock types, market indices, investment strategies, risk management, market research, and investment tools, investors can navigate the stock market with confidence and make informed decisions that align with their financial goals. With practice and patience, even beginners can become proficient in the art of stock market investing and achieve long-term financial success.