What Is The Stock Market?
The stock market widely refers to the collection of exchanges and other venues through which equity shares in publicly held companies can be bought, sold, or issued. These financial activities take place through institutionalized formal physical, or electronic platforms or via OTC marketplace which operates under a specific set of regulations.
One of the main roles of the stock market today is to provide a way for companies to raise capital through the sale of ownership shares to public investors. Concurrently, the stock market permits private investors to buy shares of stock in publicly held companies and become part owners in the companies.
How Does The Stock Market Work?
In brief, the stock market provides market participants the confidence they need to transact in shares & other financial instruments by providing a regulated and secure environment to conduct transactions. This is because the stock market is a secured and regulated environment where market participants can transact in shares with low, if not zero operational risk. It is also worth mentioning to buy and sell stocks, you need to go through an intermediary known as a licensed brokerage.
The stock market also serves as primary markets and secondary markets. Meaning, that the primary market is where shares are issued and sold to investors for the first time through the process called an Initial Public Offering (IPO). If you have experience in stock market investing, you may have heard about some of the most recent popular IPOs in 2021 like Rivian Automotive Inc. (NASDAQ: RIVN) or Coupang (NYSE: CPNG). Most importantly, the IPO process provides companies with access to a new pool of investors to help the company raise capital.
After a company’s IPO, the stock market exchanges serve as a trading platform that facilitates regular buying and selling of the listed stocks. This represents the secondary market. The stock market exchanges earn a fee for every transaction that occurs on its platform during secondary market activity.
When buying stocks in the primary market, investors are buying shares directly from the issuer (company). Whereas the secondary market is where existing shares of the company are traded between investors.
Shares can be purchased and sold in both private and public companies. The buying and selling of shares are often conducted through a stockbroker and or a stockbroker’s corresponding online trading platforms also known as an electronic trading platforms.
How To Invest In The Stock Market
Now, that we know what the stock market is, and how it works, let’s now talk about how to start investing in the stocks in the stock market. The stock market is one of the greatest wealth generators ever created. Investing money into the stock market can be confusing at first. That’s why it’s important to get the proper stock market education and to ALWAYS do your own due diligence before investing any money into the stock market today.
Let’s say you have saved and allocated $10,000 to invest. What happens next? The decision to hire a financial advisor or to simply do the research on your own to pick the best stocks to buy for beginners is entirely up to your own free will. Investing in the stock market might be easier than many would’ve thought, as all you need is an online brokerage account to get started.
However, there are a few basic questions any new investor should ask themselves before starting on this journey.
- What type of investor are you?
- Which online brokerage platform is best for my investment goals?
- How much money are you planning on using to start investing
- What type of asset class meets your goals? Stocks, Mutual Funds, Options, Exchange Traded Funds (ETFs), Bonds, etc..?
- How long is your time horizon for investing in the stock market? Short-term, mid-term or long-term investing?
- How are you planning to manage your portfolio?
What Is The Stock Market Doing Today?
When investors’ ask “what is the stock market doing today?”, they are often referring to the performance of the broad stock market indexes. The three most popular are the S&P 500 Index, Dow Jones Industrial Average, and The Nasdaq Composite Index.
The Standard & Poor’s 500 Index
The Standard & Poor’s 500 Index, or the S&P 500 index, is a market-capitalization-weighted index of the leading 500 publicly traded corporations in the United States. The S&P 500 index is widely known as one of the best gauges to measure the performance of the top American-based equities and the U.S. stock market as a whole.
Source: TD Ameritrade TOS – 20-Year Historical Performance
Dow Jones Industrial Average (DJIA)
The Dow Jones Industrial Average, also known as the Dow Jones or Dow 30, is a stock market index that tracks the performance of 30 large companies listed on the New York Stock Exchange. The Dow Jones is one of the most widely followed stock market indices in the world, and it is often used as a barometer for the overall health of the stock market.
The index was founded by Charles Dow in 1896 to serve as a proxy for the broader U.S. economy. It has been one of the most important stock market indices ever since.
Nasdaq Composite Index
The NASDAQ Composite Index is a broad-based market capitalization-weighted index of stocks in all three NASDAQ tiers; Global Select, Global Market, and Capital Market. The index was developed with a base level of 100 as of February 5, 1971. Fast forward to today, there are more than 3,700 stocks listed on the Nasdaq stock exchange. The Nasdaq is one of three major stock market indexes in the United States. Along with the Dow Jones Industrial Average and the S&P 500 Index.
The index can be used as a measure of the performance of tech stocks and growth stocks. However, because it includes all stocks traded on the Nasdaq exchange, it is not as focused as some other indexes. For example, the Nasdaq-100 Index only includes non-financial companies listed on the Nasdaq.
The 10 most heavily-weighted stocks in the Nasdaq Composite Index as of June 3rd, 2022
- Apple Inc. (NASDAQ: AAPL) – 12.31%
- Microsoft Corpporation (NASDAQ: MSFT) – 10.51%
- Amazon.com Inc. (NASDAQ: AMZN) – 6.46%
- Tesla Inc. (NASDAQ: TSLA) – 3.75%
- Alphabet Inc. (NASDAQ: GOOG) – 3.75%
- Alphabet Inc. (NASDAQ: GOOGL) – 3.57%
- Meta Platforms Inc. (NASDAQ: FB) – 3.42%
- NVIDIA Corp. (NASDAQ: NVDA) – 3.41%
- Broadcom Inc. (NASDAQ: AVGO) – 1.98%
- PepsiCo Inc. (NASDAQ: PEP) – 1.96%
In Summary
The Stock Market is a global financial marketplace. Traders, financial institutions, and funds can buy and sell shares of a company. There are many reasons to invest in the stock market. For one, it offers the opportunity to earn a good return on your investment. Over the long term, stocks have outperformed most other investments, such as bonds and real estate.
In addition, investing in stocks gives you the chance to diversify your portfolio and potentially reduce your overall risk. Due to the fact you can buy and sell stocks quickly and easily, it’s a great way to stay invested in the market without having to put all your eggs in one basket.
There are risks with stock market investing. However, with proper education, research, and diversification, these can be minimized. In closing, if you are keen on investing your money the stock market is potentially worth looking into.
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