Understanding the Stock Market for Beginners

Individuals can participate in the stock market alongside large institutions.
i Jupiterimages/Comstock/Getty Images

The stock market is a world of specialized terms, concepts and practices, and understanding the stock market can be challenging for beginners. With a bit of patient study, however, novice investors can find themselves mastering the art and science of trading on stock exchanges around the world.

Step 1

Understand the purpose of stocks and the stock market. Corporations sell shares of stock to investors as a way to raise money that does not need to be repaid. Stockholders often wish to sell their shares to other investors, creating the need for a formal, regulated market. Investors can buy and sell shares of stock between each other, at prices that shift up and down continually, on established stock exchanges.

Step 2

Understand the historical methods of trading stock. A century ago, stock traders worked at the location of the stock exchange, physically exchanging trade orders among each other at the request of their employers at large investment firms. As the industry matured, stock brokerages began targeting individual investors with their services. Individuals could use the telephone to place orders with their broker, who would then rely the information to the trader on the floor.

Step 3

Become familiar with electronic communications networks (ECN) and online trading platforms. The Internet has changed the way stock is traded around the world. Individuals can participate fully in the stock market using online stock trading services, completely bypassing the services of brokerages and floor traders. Anyone with a computer and an Internet connection can buy and sell stock on major exchanges right alongside professionals and institutions.

Step 4

Learn about stock price fluctuations and trends. Shares of stock are initially sold at a price specified by the issuing company. After the first sale, however, the price of stocks varies according to market forces. At any given time, a particular stock's price is set according to what buyers and sellers agree to in the marketplace -- the intersection of call prices and put prices. Prices shift due to a range of factors, including company financial data, changes in the industry and news releases.

Step 5

Study stock trading strategies. Traders employ different strategies to suit their individual time frames and risk tolerances. Long-term plays either involve holding a stock for long-term price growth, collecting dividend income or both. Short-term plays involve buying stocks with sharply rising values and selling them quickly at a moderate profit. Short-term strategies rely on high volume rather than high profit to achieve large gains. Stock options offer another layer of complexity, allowing investors to place hands-off bets on how a stock's price will react in the future.

the nest