In 2020, 55% of adults in the United States had some form of investment in the stock market, and interest in stock market participation would seem to be at an all time high from the plethora of publications, discussion boards, apps, and other tools dedicated to stock market trading. There is no doubt that the stock market presents an immensely exciting opportunity for wealth generation, but as with all investments, appropriate research and due diligence are required prior to putting your money on the line. In this quick start guide, we look at key questions about the stock market like: what is a stock market, how does a stock market work, where to get reliable stock market news, and whether it is safe to invest in the stock market.
What is a stock market?
A stock market is a public exchange that allows traders, including individual retail traders or institutional traders, like pension funds, to buy and sell stocks (securities that represent fractional ownership in a company) from other traders. While companies themselves do not participate in the purchase and sale of their stock on the exchanges on a day to day basis, stock markets do represent an opportunity to raise money from the general public (to ‘go public’) based on their Initial Public Offering (IPO – the first time a company’s stock is available for purchase on the open market) and varying valuations of said company stock.
As the Corporate Finance Institute confirms, the stock market plays a critical role in developing the wider national (and indeed global) economy.
Stock market examples
There are numerous stock exchanges around the world, as well as some specialist commodity exchanges, which work similarly to stock exchanges but deal with commodities rather than company securities.
Examples of stock exchanges include:
- New York Stock Exchange (MIC: XNYS).
- Shanghai Stock Exchange (MIC: XSHG).
- London Stock Exchange (MIC: XLON).
- Bombay Stock Exchange (MIC: XBOM).
- Korea Exchange (MIC: XKOS).
Examples of commodity exchanges include:
- Chicago Mercantile Exchange (CME).
- London Metal Exchange (LME).
- Intercontinental Exchange (ICE).
How does the stock market work?
As mentioned, a stock market is a place where traders and investors can come together to buy and sell stocks on a secondary basis (i.e. they buy from and sell to each other, not from or to the company itself).
In the old days, stock transactions would have to take place on paper, but nowadays technology permits all exchanges to be digital. This has numerous benefits, such as speed of execution, accurate record keeping, fair price maintenance, and provision of liquidity. The digitization of the stock market also allows for extensive regulation of the markets, which in turn makes the trading environment safer and more secure for all parties.
Pricing on the stock market is a complicated matter, but generally a stock’s price will be determined by an auction. In essence, the price is set because buyers increase the amount they are willing to pay on a stock (their ‘bid’) until the seller is willing to accept it (their ‘ask’). The difference between the bid and the ask is called a spread.
Where there are larger spreads (i.e. where there are larger differences between what a buyer is willing to pay and a seller is willing to accept), there typically is lower trading volume, because fewer deals are able to be done. Conversely, where there is a tighter spread (a smaller difference between the bid and ask), there typically is more trading activity because more buyers and sellers are able to come together to make a deal happen. Stock prices vary over time as these deals are done because each deal affects how much supply and demand there is in the market, which of course affects the value of the stock (more demand and less supply means a higher price, and vice versa).
The last core component or player in the stock markets are brokers. Brokers can be humans or, more commonly now, digital platforms, that allow traders to have access to the stock market. They are true ‘middlemen’ in this sense, taking a small cut of each buy or sell transaction. Brokers facilitate dealmaking by ‘matching’ buyers and sellers at various price points and executing the orders per their clients’ requests.
Where to get reliable stock market news
One of the toughest things about being a stock market trader is making sure that you have up-to-date and reliable information to use in your trading decisions. Unfortunately, though, not all information is equal when it comes to trading data and analyses. There are countless sources of information online that pertain to trading, but much of it is inaccurate or is deliberately contorted to convince you to make a trade one way or the other.
Your job as a trader is to seek out information and opinions that you trust, and preferably those that have been through a rigorous process even before they are published. With news sources, you should look for publications that have solid reputations in this space and that regularly publish expert opinions on matters relevant to the industry. And it’s the same with trading data. You should use sources that reference exactly where their data comes from, and that should be the most up-to-date information that is available from the exchanges.
Finding the right opinions to take notice of can be tougher. This is especially the case where you are trying to find a position to take on a more obscure stock, or trying to understand a converse position from what the majority might be following. In this case, many traders turn to social networks like Twitter or Reddit to get their information. While in many cases there is no harm in doing this, there is unfortunately a high amount of misinformation on these websites. This is especially the case with smaller stocks, which are more readily influenced by retail traders.
If you’re struggling to find information on stocks, here are some recommended sources:
- Traderverse: Traderverse exists precisely because we want to empower traders to make better decisions through accurate, real-time, expert data and information. You can use our suite of tools to discover company information, understand price history, check fundamental news that could affect stock direction, and get insights into how other expert traders are seeing the stocks.
- Broker platforms: Your broker likely has a robust platform through which you can learn about assets and see pricing, but some platforms are definitely better than others. Ally Invest, Schwarb, E*TRADE, Fidelity, Interactive Brokers, Lightspeed, Thinkorswim (TD Ameritrade), Tradestation, and Tradier are Investopedia-recommended broker platforms with the best technical analysis features.
- Financial news sites: Many of the top news websites have very well curated financial news sections, and these are a good source of data for a broader understanding of issues that affect companies and various world economies and markets (i.e. fundamental analysis). Highly recommended are Forbes, the Wall Street Journal, Bloomberg, Yahoo Finance, Investopedia, and CNN Money.
Is it safe to invest in the stock market?
As with any investment, only you can make the decision as to whether investing in the stock market is a good idea, given your individual financial circumstances and investing risk tolerance. Generally, though, the stock market is a solid and safe place to invest your money in the long term, as long as you practice good diversification strategies and you make sound decisions based on reliable data and due diligence.
One thing to bear in mind is that rarely do people become wealthy from the stock market in the short term. Sure, there are plenty of successful traders who make money day trading stocks, but if you are just getting started in stock trading, it is much more realistic to think about how you can use the stock market to build wealth as part of a long term diversified investment strategy. The volatility of intraday trading may present some good opportunities for rapid wealth generation if you have a well-trained eye, but typically is not suitable for absolute beginners unless you are planning only to stake very small amounts of your overall net worth.
Where to find out more about the stock market
However you ultimately decide to participate in the stock market, it is definitely an exciting place to be. Don’t let the excitement of trading overshadow your proper research and due diligence, though. The stock market can be a wondrous tool for generating wealth in the long term, but it can also be a relatively risky place to try to earn money in the short term. Before making any trade, make sure you have up to date information and reliable advice on which positions to take. If you’re looking for a community of traders to discuss ideas with, consider Traderverse. To help you get started in the markets, say hello to our experts in our dedicated Discord or Telegram group.
