Financial Education Series
Stock Market Fundamentals
Understanding How Markets Work
The stock market can seem intimidating, but understanding its basic mechanics and terminology can help you make more informed investment decisions. This guide covers the essentials of stock markets, different types of securities, and key factors that drive market movements.
Why This Matters
Stock market investments are one of the most accessible ways to build long-term wealth and beat inflation. Even if you invest through retirement accounts or index funds, understanding market basics helps you stay calm during volatility and make better long-term decisions.
Stock Market Basics
What Is a Stock Market?
Stock Exchanges
Organized marketplaces where stocks are bought and sold, such as the New York Stock Exchange (NYSE) and Nasdaq. These exchanges provide infrastructure for trading and establish rules to ensure fair transactions.
Market Participants
Individual investors, institutional investors (pension funds, mutual funds, etc.), market makers, and algorithmic traders all interact in the market with different strategies and timeframes.
Market Indexes
Measures of market segments like the S&P 500 (500 large U.S. companies), Dow Jones Industrial Average (30 large U.S. stocks), and Nasdaq Composite (tech-heavy).
Types of Securities
Common Stocks
Represent ownership in a company with potential for growth through price appreciation and dividends. Stockholders typically have voting rights but are last in line for company assets if bankruptcy occurs.
Preferred Stocks
Hybrid securities with characteristics of both stocks and bonds. They typically pay fixed dividends and have priority over common stock for dividend payments and asset claims.
ETFs and Mutual Funds
Baskets of securities that allow investors to buy many stocks or bonds in a single transaction. ETFs trade throughout the day like stocks while mutual funds trade once daily at closing price.
How the Market Works
Market Mechanics
Supply and Demand
Stock prices are determined by supply and demand. When more people want to buy a stock than sell it, the price rises. When more want to sell than buy, the price falls.
Trading Hours
Major U.S. stock exchanges operate Monday through Friday, 9:30 a.m. to 4:00 p.m. Eastern Time. Pre-market and after-hours sessions exist but with lower liquidity and wider spreads.
Order Types
Different ways to execute trades, including market orders (immediate execution at current price), limit orders (execution only at specified price or better), and stop orders (trigger at threshold price).
Market-Moving Factors
Company-Specific Factors
Earnings Reports
Quarterly financial results that show a company's revenue, expenses, and profit. Stock prices often react strongly to whether a company beats, meets, or misses earnings expectations.
Corporate Actions
Events like mergers, acquisitions, stock splits, dividend announcements, and share buybacks that can significantly impact a company's stock price.
Management Changes
New CEOs or other key executives can change company direction and investor sentiment, particularly if they have strong track records or different strategic visions.
Macroeconomic Factors
Federal Reserve Policy
Interest rate decisions and monetary policy from the Federal Reserve significantly impact the cost of borrowing, corporate profits, and relative attractiveness of stocks versus bonds.
Economic Data
Reports on GDP growth, unemployment, inflation, retail sales, and housing starts provide insights into economic health and future corporate profits.
Global Events
Geopolitical tensions, natural disasters, pandemics, and major policy changes can create market uncertainty and volatility across global markets.
Getting Started with Investing
First Steps
Before You Invest:
Low-Effort Starting Points:
This content is educational in nature and updated as of 2024. All investing involves risk, including the possible loss of principal. Market conditions can change rapidly, and past performance is not indicative of future results. This information is not intended as investment advice. Please consult with a qualified financial professional before making investment decisions.