If you are not well-versed at the fundamentals of the stock market, the numbers and words spewed from news channels like CNBC or from the markets section of your favorite newspaper can edge on gibberish.
Phrases like “earnings movers” and “intraday highs” and “options trading for beginners” do not mean much to the average investor, and often, they should not. If you’re in the markets for the long term — with, say, a portfolio of mutual funds targeted toward retirement — you don’t need to worry about this lingo. You can get by just fine without watching the industry much at all.
But if you are interested in trading stocks, then you need to start with some basic knowledge about how the stock exchange works.
Stock Exchange basics
The stock market is Composed of exchanges, like the New York Stock Exchange and the Nasdaq. Stocks are recorded in a particular market, which brings sellers and buyers together and functions as a market for the stocks of those stocks. The exchange tracks the supply and demand and directly associated, the price — of each inventory. (Need to back up a bit? Read our explainer about the intricacies of stocks .)
However, this isn’t your typical marketplace, and you can’t show up and pick your shares off a shelf the way that you select produce at the grocery store. Individual traders are typically represented by a broker — nowadays, that’s often an online broker. You put your stock trades through the broker, which then addresses the trade on your behalf.
Stock Exchange indicators
When folks refer to the stock market being down or up, they’re usually referring to one of the major market indicators. A market index monitors the performance of a group of stocks, which either represents the marketplace overall or a specific sector of the marketplace, like technology or retail companies.
Investors use indicators to benchmark the performance of their portfolios. You may also put money into a whole indicator through index funds and exchange-traded funds, which track a specific index or sector of this marketplace.
Bull markets, Bear markets
Neither is an animal you’d want to run into on a rise, but the market has chosen the bear as the real sign of panic: A bear market signifies stock prices are falling — thresholds change, but generally to the song of 20 percent or longer — across several of the indexes referenced earlier.
Younger investors may have read about options trading and could be knowledgeable about the term bear market but unfamiliar with the expertise: We have been in a bull market — with increasing prices, the opposite of a bear market — for more than eight decades. That makes it the second-longest bull run ever.
It came from the Great Recession, however, and that is how bulls and bears have a tendency to go: Bull markets are followed by bear markets, and vice versa, with both, frequently signaling the beginning of larger economic patterns. To put it differently, a bull market typically means investors are convinced, which suggests economic growth. On the other hand, a bear market shows that investors are pulling back, indicating the market may do so too.
The good news is that, usually, your typical bull market far outlasts the average bear market, and that’s why over the long run it’s possible to grow your money by investing in stocks.
The significance of diversification
Meaning if you invested $1,000 30 years ago, you might have approximately $7,600 today.
That long-term growth would have occurred despite many bear markets, which you can not prevent as an investor. What you could avoid is the danger that comes from an undiversified portfolio. Individual stocks often fizzle to a lifetime loss of 100%, according to a recent working paper by Arizona State University professor Hendrik Bessembinder.
Should you throw all of your money into a single business, you’re banking on achievement that may quickly be halted by regulatory issues, inadequate leadership or an E. coli outbreak. To smooth out that company-specific danger, investors diversify by pooling numerous stocks together. This helps to balance out the inevitable losers and eliminating the risk that one firm’s contaminated beef will wipe out your whole portfolio.
But constructing a diversified portfolio of stocks takes a great deal of time, patience and research. The alternative is that the above ETF or index fund. All these hold a basket of investments, so you’re automatically diversified. An S&P 500 ETF, for instance, would aim to mirror the operation of this S&P 500 by placing money into vehicles that are part of the 500 companies that are part of that indicator.
The good news? You can combine individual stocks and money in a single portfolio. One suggestion: Dedicate 10 percent or less your portfolio into selecting a few stocks that you think in, and put the rest into index funds.