Basic information and key points about stock market before investing

The Stock Market is the business of buying and selling stocks. There are many different stock exchanges around the world which are markets where the stocks, bonds, and securities are bought and sold.

Here are some basic information about stocks

• If a person owns a stock in a company they own a part of that company.

• Stocks are known as shares in a company. If a company issues 100 shares, and you own 10 shares, then you own 10% of the company.

• People buy stocks because they hope that the company will grow and become worth much more money. As the company becomes worth more, the investment in the stock becomes worth more.

• If someone buys (invests money into) a stock and the company value goes up, the investment is worth more. If they want to sell the stock they will make a profit.

• Some stocks go down in value and investors lose money.

• Sometimes an investor buys stocks and they become worthless because the company fails and closes its doors.

• When the stock market is overvalued it is considered to be a 'bubble', and when the bubble bursts usually people lose a lot of money.

• When stock market prices are climbing it is referred to as a 'bull market'.

• When stock prices are falling it is referred to as a 'bear market'.

• The stock markets help to raise money for companies when they need capital to expand, and this in turn creates the potential for investors to make money on stocks.

The next logical question is:

Who sets the stock prices and how are they calculated when a company goes public?

In simple terms, the stock price of a company is calculated when a company goes public, an event called an initial public offering (IPO).

This is when a company pays an investment bank to use very complex formulas and valuation techniques to derive a company's value and to determine how many shares will be offered to the public and at what price. 

For example, a company whose value is estimated at $100 million may want to issue 10 million shares at $10 per share or they may want to issue 20 million at $5 a share

After a company goes public and starts trading on the exchange, its price is determined by a variety of factors

Factors that affect the stock prices(key points)

Economic factors

1. GDP of the country

2. Economic outlook

3. Inflation

4. Deflation

5. Economic and political shocks/stability

6. Changes in economic policy.

7. The value of the country's currency

Company news and performance

Here are some company-specific factors that can affect the share price:

• news releases on earnings and profits, and future estimated earnings
• announcement of dividends
• introduction of a new product or a product recall
• securing a new large contract
• employee layoffs
• anticipated takeover or merger
• a change of management
• accounting errors or scandals

Industry performance

Often, the stock price of the companies in the same industry will move in tandem with each other. This is because market conditions generally affect the companies in the same industry the same way. But sometimes, the stock price of a company will benefit from a piece of bad news for its competitor if the companies are competing for the same market.

Investor sentiment

Investor sentiment or confidence can cause the market to go up or down, which can cause stock prices to rise or fall. The general direction that the stock market takes can affect the value of a stock:

• bull market – a strong stock market where stock prices are rising and investor confidence is growing. It’s often tied to economic recovery or an economic boom, as well as investor optimism.
• bear market – a weak market where stock prices are falling and investor confidence is fading. It often happens when an economy is in recession and unemployment is high, with rising prices.

Investors look at all these factors before investing a huge amount in the stocks or any other security.

By this time you may have got good knowledge on stock market, so you should check out Here's how you can start investing in the stock market

Hope this article helps you. If anything you want to add to this article, make sure you comment in the comment section