Introduction to Stock Market 101
The stock market is a massive and dynamic financial ecosystem that is crucial to the global economy. It allows people and institutions to invest and perhaps enhance their wealth. The stock market, on the other hand, might be scary and confusing for someone new to the world of securities trading. We will break down the foundations of equities trading in this thorough tutorial, assisting you in grasping the principles and taking your first steps into the fascinating world of stocks.
What are stocks?
Stocks, often known as shares or equities, indicate a company’s ownership. When you purchase stock, you become a shareholder, which means you own a piece of the firm. These shares are the foundation of the stock market and may be exchanged on a variety of exchanges throughout the world.
Understand the following key concepts:
Shares:
Each corporation splits its ownership into shares. When you purchase a share, you become a part-owner of the firm.
Shareholder: As a shareholder, you have various rights, including the right to vote at the company’s shareholder meetings.
Dividends: Some businesses pay out a percentage of their profits to shareholders in the form of dividends.
Why do companies issue stock?
Companies issue stocks for a variety of purposes, including:
Capital Infusion: Companies can raise capital for expansion, R&D, or debt repayment by selling shares to the public.
Ownership Distribution: Companies can spread ownership among numerous shareholders, making it simpler to attract investors and stakeholders.
Liquidity: Stocks provide liquidity to investors. You can buy or sell shares on a stock exchange, making it easier to convert your investments into cash.
Stock exchanges
Stocks are exchanged on several stock exchanges across the world. The New York Stock Exchange (NYSE) and Nasdaq in the United States, the London Stock Exchange (LSE) in the United Kingdom, and the Tokyo Stock Exchange (TSE) in Japan are among the most well-known exchanges.
How Trading Works
Stock exchanges are places where buyers and sellers may trade shares. A bid-ask mechanism governs this trading process.
Bid Price: The amount a buyer is willing to pay for a given stock.
Ask Price: This is the price a seller is asking for the same stock.
A trade happens when the bid and ask prices match and the stock exchange hands over.
Stock Types
There are several sorts of stocks, each with its own unique set of characteristics:
Common Stocks: The most common sort of stock Common shareholders have voting rights at shareholder meetings and may earn dividends, though they are not guaranteed.
Preferred Stocks: Preferred stockholders have a greater claim on the company’s assets and earnings than regular shareholders. They normally earn set dividends.
Blue-Chip Stocks: These are shares of well-established, financially secure, and respectable corporations. Blue-chip stocks are regarded for their steadiness and dependability.
Small-Cap, Mid-Cap, and Large-Cap Stocks: Stocks are classified based on their market capitalization. Small-cap corporations have a lower market worth, but large-cap companies are more substantial.
Growth stocks are firms that have the potential for considerable future growth. Rather than paying dividends, they frequently reinvest their revenues.
Value Stocks: Value stocks are often shares of firms that the market believes are undervalued. They may offer dividends and are frequently seen as low-cost investments.
What exactly is the stock market?
The phrase stock market refers to a number of exchanges where shares of publicly traded corporations may be purchased and sold. Such financial operations are carried out through regulated exchanges and over-the-counter (OTC) markets that follow a set of rules.
The terms “stock exchange” and “stock market” are frequently used interchangeably. Stock market traders purchase and sell shares on one or more of the stock exchanges that comprise the entire stock market.
It’s important to realize that, while the stock exchange and stock market are frequently used interchangeably, they’re not the same thing. A stock exchange is a non-governmental, self-regulating marketplace where stockbrokers may trade stocks and other assets.
One or more stock exchanges may exist in a country or area. Nigeria, for example, has the Nigerian Exchange (formerly the Nigerian Stock Exchange, NGX) and the NASD OTC Exchange. A stock market is a group of stock exchanges in a certain region.
The Securities and Exchange Commission regulates the Nigerian stock market, which supervises the Nigerian capital market and typically offers laws for fair trading and a stable market.
Understanding Nigeria’s Stock Exchange
The stock market brings together buyers and sellers of securities to engage and deal. The markets provide price discovery for corporate shares and act as a barometer for the wider economy. As market players compete in the open market, buyers and sellers are guaranteed of a fair price, a high degree of liquidity, and transparency.
Stocks, often known as shares or equities, represent ownership in a corporation. When you buy stocks, you become a shareholder and partake in the company’s earnings and losses. For example, if you purchase 100 shares of ABC firm, you will own a piece of the firm and will be able to profit from its success.
Indicators of the market
Market indexes are measurements of the stock market’s overall performance. The Nigerian Exchange Limited (NGX) offers indices such as the All-Share Index (ASI) as well as sector-specific indices such as the NGX Banking Index and NGX Consumer Goods Index. These indexes monitor the performance of a subset of equities in order to give insight into the market’s direction and trends.
How does the stock market work?
Stock exchanges provide a safe and regulated environment in which market participants may confidently trade shares and other qualified financial instruments with zero to low operational risk. The stock markets function as primary and secondary markets, according to the norms established by the government.6
The stock market, as a main market, enables corporations to issue and sell their shares to the general public for the first time via an initial public offering (IPO). This activity assists businesses in raising the required funds from investors.
A corporation splits itself into shares and sells part of those shares to the general public for a price per share. To enable this process, a corporation needs a marketplace where these shares may be sold, which the stock market provides. A publicly traded firm may also issue fresh, extra shares in the future through other means, such as rights issues or follow-on offers. They may even repurchase or delist their stock.
Investors will purchase firm stock in the hope that the value of the stock will grow, that they will get dividend payments or both. The stock market serves as a facilitator for this capital-raising process and is compensated by the firm and its financial partners for its services. Investors can also use stock exchanges to acquire and sell shares they already possess in the secondary market.
How are stocks exchanged?
When it comes to approaching stocks, it is critical to distinguish between trading and investing.
Trading
By speculating on assets over a shorter duration, a trader might possibly gain (or lose) money. Traders will frequently focus on technical patterns, utilizing tactics like scalping and day trading, and will frequently use short-term timeframes such as ten-minute charts.
Online trading systems allow traders to track the performance of their stocks as well as their entry and exit prices.
Investing
An investor might possibly make money trading stocks by acquiring the asset, usually through a brokerage account, and keeping it for a longer period of time. During this time, he/she may search for dividends and interest, as well as long-term value gains, culminating in the sale of the stock(s).
This ‘buy and hold’ approach may require you to keep a stock for at least five years. Focusing on a ‘total return’ means that interest, dividends, distributions, and capital gains are all factored into the overall return from a certain company.
How do I select the best stocks to trade?
When it comes to selecting the ‘correct’ stocks, market participants may benefit from sticking with firms they are already familiar with. Considering elements that assist in predicting the likelihood of its price growing may also be beneficial. These elements are as follows:
Company’s financial health:
What does the balance sheet of the firm look like? Have your revenues and earnings increased in recent years? What is its total debt? Is it increasing efficiency?
Levels of innovation:
What new items or plans for expansion are in the works? How does it compare to competitors in terms of customer satisfaction? Is it well-positioned to pivot and meet new market demands?
Dividends:
If a corporation pays a dividend, is it raising it? When is a dividend paid?
Price and valuation:
Is it undervalued? A price-to-earnings ratio, or P/E, may be calculated by dividing a company’s current stock price by its earnings per share. A P/E of 15 is frequently seen as ‘low’. However, due to slower growth, it may be inexpensive. It may be worthwhile to seek ‘cheap’ equities that are favorable in as many of the aforementioned areas as is feasible. Assessing a company’s ‘fair’ worth can also be accomplished by estimating total assets on its balance sheet, less depreciation, and liabilities.
Liquidity:
Liquidity refers to equities with enough trading volume to allow traders to join and exit positions easily. ExxonMobil, General Electric, and Alibaba are examples of liquid stocks. For a more thorough view, read more about stock market liquidity.
Volatility
refers to the equities that have the greatest potential for considerable price change. Investing in a volatile stock might be dangerous, but it can also bring lucrative possibilities. Learn more about stock market volatility here.
How to Start Trading Stocks?
The simplest approach to begin trading or investing in stocks is through a trading platform/online brokerage account, which can be established with just evidence of ID and a financing method of choosing. Finding a low-commission broker is critical for more active traders, since they will naturally pay a higher charge than those who trade at a lesser volume.
Investors must also select whether to buy individual equities or invest in mutual funds. Individual stocks, as previously said, represent a portion in the firm, but mutual funds pool a variety of equities, with managed funds attempting to beat the market and exchange-traded funds (ETFs) tracking an index.
Get started in stock trading: A Checklist
- Establish trading goals
- Choose the right broker
- Research key companies
- Keep a diversified portfolio
- Practise risk management
What happens after you purchase a stock?
Buying and selling stocks must be done through a broker. A broker is just a company that is authorized to trade stocks on a stock market.
A broker is someone who instructs what to purchase and sell. It is more often than not an online stock broker, such as Schwab or Fidelity. These businesses do the full transaction electronically.
Here’s how it works when you buy a stock:
You tell your broker (or enter it electronically) what stock you want to buy and how many shares you want.
Your broker sends your order to the exchange. A market maker sells you shares at the current market price.
The shares are subsequently delivered to your account.
On a stock exchange, how are prices determined?
Stock exchange prices are simply determined by supply and demand.
The bid price is the highest price someone is willing to pay for a stock at any particular time. There is also a minimal price that someone else is prepared to establish for the shares of stock, known as the ask price.
Consider the stock market to be an auction. Buyers are continuously bidding on equities that other investors are prepared to sell.
If a stock is in high demand, buyers will acquire shares faster than sellers would sell them. This has the potential to raise the price. If, on the other hand, more investors sell than acquire a stock, the market price falls.
There are several factors that might move the market up or down. For example, during the recent stock market decline, major factors for the market’s bad performance included inflationary pressures, supply chain concerns, rising interest rates, and recession fears. Because of these circumstances, more investors sold stock than bought it, causing stock prices to fall overall.
Taking it a step further, examine how you can nearly always purchase or sell a stock you own. This is where market makers come in.
Conclusion of Stock Market 101
Investing in the Nigerian stock market may be an excellent way to increase your money, but there are hazards to consider. You’ll be able to make better investment selections if you do your homework and consider factors such as a company’s performance, market trends, and the status of the economy.
Keep in mind that investing in the stock market is not without risk, and you may lose money. As a result, before investing any money, get counsel from a reputable financial advisor and only invest funds that you can afford to lose.