Stock Markets Guides

Author: Stelian Olar

Basics of Stock Market

Trading Guide

As unemployment ravaged the labor market during the coronavirus pandemic, many people
turned to the stock market to substitute their income or replace the lost income.

When trading in the stock market, you require some basic knowledge to get started. You also
must be registered with an authorized online broker since nearly all stock market transactions
are done online.

In this guide, we discuss the stock market basics and equip you with everything you need to
start your stock trading journey.

1
What is a Stock?
The stock is an old form of investment that works surprisingly simply; a company issues
securities that embody a piece of the company itself.

In other words, whoever owns the shares, has a say in how the company is run. If the business
is going well, they also benefit by increasing the value of their shares and sometimes by
paying out or distributing part of the profits (dividend).

What is the Stock Market?

The stock market is the market where companies issue securities to cover their financing
needs. Investors who buy such securities become shareholders of the company and receive a
dividend. The size of the dividend depends on the company's profits.

You can buy securities from all the companies listed in the various financial centers of the
world. An efficient and functioning stock market is considered critical for economic
development, as it offers companies the opportunity to collect capital from investors.

The stock market is divided into the following submarkets:

● The primary market (also called the issuance market or first market), where the
shares of a company are traded for the first time, i.e., during the IPO. The initial issue

2
 of shares is called IPO (Initial Public Offering). The capital generated flows to the
issuing company.
● The secondary market (also known as the circulation market), where shares already
issued are traded. The financial securities are sold from investor to investor without
capital flowing to the issuing company.

The stock market has two essential functions.

The first is the provision of capital to companies with which they can finance and expand their
businesses. By selling shares instead of raising the capital needed for expansion in loans or
bonds, the company avoids borrowing and the associated interest burden.

The second function of the stock market is to allow investors to participate in the profits of
listed companies.

Investors can benefit from stock purchases in two ways. Some stocks pay regular dividends so
that shareholders can earn a regular income. The other option is to sell shares at a profit if the
share price rises against the purchase price.

Stock Trading for Beginners

Just like any financial market, the stock market operates based on the system of supply and
demand. If you buy shares, there is hope that other investors will also find interest in
acquiring shares in the same company. If the popularity of a stock increases, buyers will
increase the bids to necessarily acquire shares of it, thereby increasing the selling price.

In theory, an increase in a company's stock price results from improved economic value and
potential also called "fundamentals". In reality, stock prices change due to various causes;
only a few can be foreseen as an investor.

On online exchanges, you can usually trade ordinary shares.

3
How to Learn the Stock Market
When trading securities on the stock exchange, there are two schools of thought on selecting
your investments.

● The first is fundamental analysis. It relies on financial reports and public statements of
a company to estimate the industry's financial health.
● The second school of thought is called technical analysis. It is assumed that the price
of stock swings back and down, following a certain pattern that you can learn to track
down to profit from it.

However, technical analysis is not as widely accepted as fundamental analysis. Many traders
use a mixture of both techniques to look for the right investments.

Selecting a stock with tangible "fundamentals" and occasionally taking a technical indicator
to trade is a safer strategy than relying on just one technical indicator.

4
Before you decide to buy or sell a company's share, you should first deal with its management
and competitiveness.

Typically, online brokers provide comprehensive summaries with the latest news, stories,
financial statements, analysis, and historical charts to get an insight into different companies.
This gives you a comprehensive picture of a company whose shares you intend to acquire.

Learning to trade starts with financial literacy. Reading the news and financial websites,
listening to books on the topic, listening to various podcasts, and attending investment
courses are ways to gather information.

You can also join a local investment association or join online financial groups to exchange
ideas with more experienced traders and benefit from them. However, reading is no
substitute for experience. If you want to collect these without capital investment, demo
accounts are available.

Another way to practice is trading on the "penny stock" market. Many different companies
offer shares in the price range of a few cents per share. This makes it very easy to experience
leverage, market trends, and profits, which have no significant impact because you are in a
minimal price range.

Investing for Beginners

A stock market is an ideal place for beginner investors since it offers the opportunity for both
long-term and short-term investment.

Some of the most prominent stock market investors like Warren Buffet have historically
employed buying and holding stocks for the long haul.

The big question, of course, is why the value of stocks should continue to grow so
continuously in the future. After all, the stock market development is uncertain.

No one knows where the world stock market will be in a few years. You can derive a certain
pattern for the future from the returns of the past. But there remain forecasts that may or may
not come true.

As the economy grows, corporate profits increase too. Profits, in turn, are the long-term fuel
for rising share prices.

5
You don't have to be an expert to realize that a company becomes more valuable with
annually increasing returns. This connection is also confirmed by research. Studies show that
stock prices follow profits in the long run. Accordingly, investors can continue to have the
right to hope for rising share prices as long as the global economy continues to grow.

Note that economic growth does not automatically have to do with high resource
consumption. Even a recycling company or a media group can be very profitable and grow.

The purpose of a company is to make a profit. In other words, it wants to earn more money
from selling a good or service than its production has cost. Of course, sometimes it works
better, sometimes worse, and sometimes not at all. But, if you consider a large group of
companies over a longer period, they should make profits on average.

It is to be expected that the owners, in this case, the shareholders, will get more out of it in the
long term compared to saving in the bank account instead of in shares. Because otherwise, of
course, they would do that – what else would they bother with the whole business operation?

One representation of this is the "hierarchy of the capital market". Savers invest money in
banks. Banks lend it at a higher price (interest rate) to make a profit themselves. Large
borrowers, in turn, are companies. They are also aiming for a profit – and as a result, they
want to give their shareholders a higher return than the loans taken out for it have cost, so the
matter is worthwhile.

Trading the Stock Market

Trading the stock market isn't any different from any other type of financial trading. You can
go long (buy and sell when the price increases) or short (sell and buy back when the price
drops).

These two stock market trading strategies offer the best trading opportunities for day traders.

Day trading, also called intraday trading, is a stock trading strategy where traders close all
their open positions within the trading day. It gives the traders the chance to benefit from
short-term price fluctuations.

Typically, day traders often use leverage (margin trading) to increase their profits. This is
made possible by CFDs – which we discuss in the next section.

6
With this strategy, stock traders can trade on any stock exchange globally.

That's the primary advantage of online stockbrokers; they operate 24/5, which means you can
trade any time you want. However, keep in mind that not all stock exchanges open at the
same time. They only operate during business hours. This is usually from 9 AM to 4 PM local
time.

Buying Stocks or Using CFD's

The key difference between holding a long position with a CFD and buying security is the
ability to make leveraged trades. The CFDs are traded on margin. This means that a trader can
open larger positions based on the amount of his initial capital.

Contracts for difference (CFDs) Traditional stocks

Trade from a contract to margin. The The purchase and sale of deliverable shares of
value is derived from a basic instrument a company on a stock exchange. More suitable
that you do not own. Suitable for for long-term trading
intraday, day, and medium-term trading

You trade CFDs with leverage to achieve You pay the full value of your trade-in advance.
greater exposure with your initial capital.

CFDs are exempt from stamp duty. When buying shares, you pay stamp duty on
the transaction.

CFDs allow you to open a long or short When buying shares, you can only benefit from
position so that you can benefit from rising prices.
rising and falling markets.

You can trade various financial You can only trade stocks.
instruments: stocks, indices,
commodities, currencies, and
cryptocurrencies.

They trade around the clock in numerous They only trade during stock exchange
markets. opening hours.

7
 No shareholder privileges. You get shareholder privileges.

Investing for Dividends

Shareholders are involved in the company's success and regularly receive a dividend,
provided that the company generates profits. At the end of a financial year, a company can
make such dividends as bonus payments. The dividend is an important part of an investor's
return. It is based on the company's earning power, economic situation, and dividend policy.

Most stock market investors who do not intend to hold their stock for longer can buy a
company's stock towards the end of the financial year. This makes them eligible for dividends.

Typically, your stockbroker provides the dividend calendar on their website.

To evaluate a company's dividend, an investor can calculate the dividend yield. It results from
the following formula:

Dividend yield = (dividend / share price) x 100%

The dividend is related to the current share price. Only from combining these two values can
one judge whether the dividend payment is attractive or not: the higher, the better.

Basics of Stock Market Trading Books

Some of the best stock market investors have horned their trading and investment habits
from books throughout history.

While there are thousands of stock market trading books, the two most consequential ones
are "Stock Investing for Dummies" by Paul Mladjenovic and 'The Intelligent Investor by
Benjamin Graham.

Stock Investing for Dummies by Paul Mladjenovic

This is a bestselling guide for remaining a steady investor throughout the highs and lows of
the stock market cycle. It simplifies the stock market for a beginner investor who might have

8
otherwise drowned in the noise of stock market investing. It gives the best suggestions of
what to do and buy when the market is down.

The book covers every aspect of investing, from the financial mindset and how to overcome
the emotional aspect of investing. It advises on how to conduct proper company analysis and
what to look for in financial statements.

The Intelligent Investor by Benjamin Graham

This book is considered the ultimate guide to stock market investing. Benjamin Graham is
hailed as the greatest investment guru of recent history – having mentored some of the best
stock market investors, including Warren Buffet.

The book details six primary principles for investing in the stock market:

● Understanding the company and the business you invest in

● Having a margin of safety in your investment
● Having confidence in your investment analysis
● Know the management of the company you invest in
● Only invest based on the fundamentals, not popularity
● Accumulate your profits gradually – do not go for quick gains

9
Lastly
Investing in the stock market can seem daunting at first. But with this guide, you can be on
your way to investing in the stock market like the pros. We hope you find the guide
informative and useful.

Stock Markets Guides

10