EVERY PERSON KNOW BEFORE STARTING STOCK MARKET

 What is a Stock?

Stock is a piece of ownership of a company. When a company needs extra money to help grow their business (like maybe they want to go from 1 store to 100 stores), they can sell some or all of the ownership of the company in the form of a stock offering.  They may want to raise $100,000,000 and if the hire an investment banking firm on Wall Street to help value the company, set the initial price of the stock, and then sell the shares to the public. So if you were to buy 100% of a company’s stock, you would own the whole company. If you own stock then you also get to vote on major decisions of the company.  Keep in mind though that each share gets one vote so if you only own 100 shares and the company has 100,000,000 shares outstanding your vote is only worth so much.  Over the last 100 years, owning stock has, despite the markets ups and downs, been the best way to invest your money over the long term.

What is a share?A share is one individual piece of stock.  Most companies have millions and some of the larger companies have billions of shares issued.  So if you only own 100 shares you would own a very tiny percentage of ownership of a company.  It is, nonetheless ownership of the company.

What is the Dow Jones or the DJIA?The Dow Jones Industrial Average (often referred to as the “Dow”) is composite number that represents the share prices of 30 U.S. “blue-chip” stocks. The DJIA is the most well-known market indicator in the world and was created in 1896 by Dow Jones & Company, which is actually a publicly-traded company (DJ) on the New York Stock Exchange (NYSE). They produce many important business publications including The Wall Street Journal, Barron’s, and several stock indexes.  There are other indices, as you will read below.

What is the Nasdaq?The NASDAQ refers to two different things. First is the largest electronic stock market in the U.S. – the National Association of Securities Dealers Automated Quotation System. Second is the popular stock index called the NASDAQ Composite Index. It measures all domestic and international stocks listed on The NASDAQ, which number over 3,000. It was started in 1971 and is now one of the most important stock indexes.

What is the Big Board?The Big Board is another name for the New York Stock Exchange.

What is the S&P 500?The S&P 500 is a stock index published by Standard & Poor’s. It measures 500 U.S. stocks that are supposed to be representative of the overall stock market. It was created in 1957.

What determines a stock’s price?There are many factors that play into a stock’s price. Overall, though, the price is determined by investors’ perceptions of what the stock is worth.
Some of the biggest factors include:
How big and successful the company is (especially its earnings)
Recent company news
The state of the U.S. and world economies
Whether there is a bull or bear market
World events, whether good or bad
For more information, see our Stock Prices page.

What is a bull market?A bull market occurs when stock prices are rising faster than their historical averages. It can last months or even years. It is the opposite of a bear market.

What is a bear market?A bear market occurs when stock prices are falling faster than their historical averages. It can last months or even years. It is the opposite of a bull market.

What is a market crash?The market has “crashed” when stock prices have dropped dramatically. One of the worst crashes was Black Tuesday, which occurred on October 29, 1929 and led to the Great Depression.

What is insider trading?Insider trading occurs (1) when an insider to a company, such as an officer or someone who owns a large percentage of the company, trades the company’s stock. This is legal and acceptable, as long as that person is not trading based upon non-public company information.

Insider trading also occurs (2) when anyone, including employees, trades using non-public company information. This is considered illegal.

How much money do I need to get started?These days, you can open an online account with a brokerage with as little as $5. When you purchase stocks, your brokerage will generally charge you a commission fee of $5-25, depending on the type of brokerage and type of order you place.

What is the Bid price? What is the Ask price?When you request a quote for a stock, you will receive the bid price and the ask price. The bid price is the best (highest) price you might receive if you sell your stock back to the market. The ask price is the best (lowest) price you might receive if you buy stock from the market.

You are not guaranteed to get these prices because the market fluctuates constantly and prices change quickly. Also, if you buy (or sell) shares of a low-volume stock, you run the risk of affecting the price due to excess demand (or supply).

Will somebody always buy my stocks when I sell them?No. If you try to sell more shares than people are willing to buy or if your price is unreasonable, it may take a long time for them to sell, if at all. However, if you use market orders on medium or high volume stocks you should not have any problems selling them immediately.

What is day trading?Day trading is the process of buying and selling the same stock during one day. Professional day traders commonly trade many times per day. More Details.

When is the market open?U.S. markets are usually open 9:30am-4:00pm Eastern time, except on holidays.

How much return can I expect?Historically, the market has advanced roughly 10% per year. Of course this rate fluctuates constantly. For instance, it may grow up 30% one year, then fall 20% the next year.

How do I know which stocks to buy?That is a great question. With over 8,000 different stocks to choose from, it can be overwhelming to pick some possible winners.

Many people simply buy stocks that are recommended to them by their brokerages, their friends, or experts from TV, magazines, and newspapers.
Some people buy stocks from companies they think are big, stable, and successful. This may seem like a safe route, but there are no guarantees.
Other people buy stocks based on rumors that the price will rise/fall sharply soon.
Many experienced traders watch financial news on TV, read the relevant newspaper stories, and investigate companies that are in the news. They also use “technical indicators,” which are numbers or graphs which may help indicate whether a stock will rise, fall, or stay the same.

A few people will randomly pick stock symbols by throwing a dart at a newspaper, for instance.

What is a mutual fund?A mutual fund is a fund created by an investment company which combines money from many investors and invests it in a group of stocks, bonds, or other investment vehicles. The investment company actively manages the portfolio to meet a desired goal, such as long-term growth or steady dividends. One major benefit is diversification. Many mutual funds also charge a fee when someone buys or sells shares.

When someone buys shares of a mutual fund, they are not directly buying shares of the underlying companies. Instead, they are entitled to a proportional amount of the fund’s profits, which are usually distributed two or three times per year.

What is a mutual fund’s N.A.V.?The Net Asset Value (NAV) is the current price of a mutual fund, which is calculated at the end of each business day. It is the total value of the fund’s assets minus its liabilities and divided by the total number of shares outstanding. It is similar to a stock’s closing price for the day.

What is a 401(k) plan?A 401(k) is a type of personal pension plan that is offered by many employers. Employees contribute part of their salary (before taxes) and employers commonly match part of the contribution. The bulk of the plan is usually invested in mutual funds.

What are the main ways to make money with stocks?Buy Low, Sell High (traditional long trading)
Sell High, Buy Low (short selling)
Dividends
Options trading
Futures

What is short selling?Short selling is the act of selling stock that you don’t own at a high price by borrowing it from a brokerage and then buying it back at a lower price in the future. The hope is that the stock price will drop in value and a profit can be made. This is an advanced technique that has strict requirements and higher risks.

What is a dividend?A dividend is money that a company gives to its shareholders when it has extra profit. Since the shareholders own the company, they deserve its profits. However, sometimes companies want to use these profits to help grow their business and decide not to distribute dividends, at least for a while.

What is the P.E. ratio?The Price to Earnings ratio is simply the price of a company’s stock divided by its Earnings Per Share. It is often used as an indicator of whether a stock is overpriced, underpriced, or on par. The PE ratio by itself is not always enough to make a good determination but it can be helpful to compare it with other companies in the same industry. The NASDAQ’s average P/E is about 35.

What is a stock split and a reverse stock split?A stock split is an increase in the number of outstanding shares of a stock. The price of the stock is immediately adjusted so that the total equity remains the same. For instance, if a $100/share stock splits 2 for 1, there will be twice as many shares but they only be worth $50 each now. This is usually done to make the stock more affordable to the public.

A reverse stock split is a decrease in the number of shares. This is usually done to raise the price per share to meet stock exchange requirements or simply to look more “healthy.”

What is an IPO?When a company issues stock to the general public for the first time, it is called an Initial Public Offering. The SEC has strict guidelines on how this is carried out. The company can issue more stock in the future, which is called a Secondary IPO.

What is Dollar Cost Averaging?DCA is the act of buying the same dollar amount of a stock each month. This allows you to buy more shares when the stock’s price is low and fewer shares when it is high. It can often be more successful than buying the same number of shares each month.

What is a penny stock?Less than $1 (or $5 in some cases) per share. 

What is a small-cap stock? Mid-cap? Large-cap?These terms refer to a company’s market capitalization, which is the number of outstanding shares times the stock’s price.

Small cap:	$250 Million to $2 Billion, approximately
Mid cap:	$2 Billion to $10 Billion, approximately
Large cap:	$10 Billion and up, approximately

What is a Blue Chip stock?It is the stock of a large company that has a long history of stable operation and solid stock performance. A great example is General Electric.

What is the SEC?The Securities and Exchange Commission (SEC) is the government agency responsible for protecting investors by monitoring and regulating brokers, dealers, and the stock and bond markets in the U.S. They also make sure publicly-traded companies disclose the required business details to the public.

What is a Margin Account?A margin account allows you to quickly and easily borrow money from your brokerage to purchase additional shares. In other words, it provides leverage for your account. It also allows you to do short selling. Of course interest is charged interest on any borrowed money and the SEC has very strict regulations on these accounts.