How does the stock market work for beginners?
The term “stock market” often refers to one of the major stock market indexes, such as the Dow Jones Industrial Average or the S&P 500. Because it’s hard to track every single stock, these indexes include a section of the stock market and their performance is viewed as representative of the entire market.
A stock market, equity market or share market is the aggregation of buyers and sellers of stocks (also called shares), which represent ownership claims on businesses; these may include securities listed on a public stock exchange, as well as stock that is only traded privately, such as shares of private companies which are sold to investors through equity crowdfunding platforms. Investment in the stock market is most often done via stock brokerages and electronic trading platforms.
You might see a news headline that says the stock market has moved lower, or that the stock market closed up or down for the day. Most often, this means stock market indexes have moved up or down, meaning the stocks within the index have either gained or lost value as a whole. Investors who buy and sell stocks hope to turn a profit through this movement in stock prices.
The concept behind how the stock market works is pretty simple. Operating much like an auction house, the stock market enables buyers and sellers to negotiate prices and make trades.
In the late 18th century, stock markets began appearing in America, notably the New York Stock Exchange (NYSE), which allowed for equity shares to trade. The honor of the first stock exchange in America goes to the Philadelphia Stock Exchange (PHLX), which still exists today. The NYSE was founded in 1792 with the signing of the Buttonwood Agreement by 24 New York City stockbrokers and merchants. Prior to this official incorporation, traders and brokers would meet unofficially under a buttonwood tree on Wall Street to buy and sell shares.
The stock market works through a network of exchanges — you may have heard of the New York Stock Exchange or the Nasdaq. Companies list shares of their stock on an exchange through a process called an initial public offering, or IPO.
Investors purchase those shares, which allows the company to raise money to grow its business. Investors can then buy and sell these stocks among themselves, and the exchange tracks the supply and demand of each listed stock.
Supply and demand help determine the price for each security, or the levels at which stock market participants — investors and traders — are willing to buy or sell. Computer algorithms generally do most of those calculations.
The advent of modern stock markets ushered in an age of regulation and professionalization that now ensures buyers and sellers of shares can trust that their transactions will go through at fair prices and within a reasonable period of time.
Today, there are many stock exchanges in the U.S. and throughout the world, many of which are linked together electronically. This in turn means markets are more efficient and more liquid.
Stock exchanges are secondary markets, where existing owners of shares can transact with potential buyers. It is important to understand that the corporations listed on stock markets do not buy and sell their own shares on a regular basis (companies may engage in stock buybacks or issue new shares, but these are not day-to-day operations and often occur outside of the framework of an exchange).
So when you buy a share of stock on the stock market, you are not buying it from the company, you are buying it from some other existing shareholder. Likewise, when you sell your shares, you do not sell them back to the company—rather you sell them to some other investor.
Investing in the Stock Market
Numerous studies have shown that, over long periods of time, stocks generate investment returns that are superior to those from every other asset class.
Stock returns arise from capital gains and dividends.
A capital gain occurs when you sell a stock at a higher price than the price at which you purchased it.
A dividend is the share of profit that a company distributes to its shareholders.
The industry standard for stock classification by sector is the Global Industry Classification Standard (GICS), which was developed by MSCI and S&P Dow Jones Indices in 1999 as an efficient tool to capture the breadth, depth, and evolution of industry sectors.20 GICS is a four-tiered industry classification system that consists of 11 sectors and 24 industry groups. The 11 sectors are:
This sector classification makes it easy for investors to tailor their portfolios according to their risk tolerance and investment preference. Learn more at Investopedia
If you’re just starting to invest or are investing with little money, the best way to buy stocks may not be by investing individually but rather to buy in bulk through an ETF or mutual fund.
Funds pool hundreds or thousands of stocks into a single investible entity. Investors who buy shares in a fund get a proportional share of all the stocks in the fund.
Technically, if you buy Apple through a fund, you don’t own Apple directly; you own a share in a fund that owns Apple. But if you buy Apple through a fund, you also get a share in a fund that owns many other companies, making you far more diversified than if you just owned just Apple.
Plus, most funds trade for less than the price of one share of Apple.
Regardless of how or where you invest, remember that stock prices are volatile.
Learn to trade our Strategy
Our Strategy focuses on supply and demand, market sentiment, momentum and Order Traps (Stop Hunts and Fakeouts)
Supply And Demand Trading
As supply and demand traders, we do not need to pay attention to the news, fundamentals or any earnings reports. Why is it that you see positive News and then the underlying market drops like a rock, or a negative news announcement and the market rallies? You are probably missing the fact that there big institutions are trying to make money!
Unless you are doing very short term trading and scalping, you should not worry about fundamentals or earnings announcements.
You can use these imbalances to plan your trades in lower timeframes. Trading is just waiting for the right trigger points and scenarios to present themselves. We need to patiently wait for the correct scenarios and setups to happen and wait for the price to react from our levels and we can take advantage from these moves!
If you want to learn how to trade using our trading strategy, join our Price Action Trading Course.
What are Fakeouts (Order Traps, Stop Hunts)?
First things first, before you can learn our strategy you have to understand how to use order traps to your advantage, you have to know what they are and how to identify them.
Order Trap ( Stop Hunts, Fakeouts ) are terms used in technical analysis to refer to a situation in which a trader enters into a position in anticipation of a future transaction signal or price movement, but the signal or movement never develops and the asset moves in the opposite direction.
Order Traps are when a trader puts on a position expecting it to move in a direction and it fails to do so.
Stop Hunts happen when many traders plan their exit by offsetting orders to make sure their potential losses are limited
Stop Hunts can cause considerable losses for a technical analyst. These traders will typically rely on well-tested patterns, multiple affirmations of an indicator, and specific allowances to protect from significant losses. Sometimes the setup can look perfect, but outside factors can cause a signal to not develop as planned.
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