Understanding the Stock Market
The stock market is where buyers and sellers come together to trade ownership in companies. When you buy a stock, you're buying a small piece of that company—making you a shareholder. The stock market has created more wealth for ordinary people than any other investment vehicle in history. Understanding how it works is the first step toward building long-term wealth through equity investing.
What is a Stock?
🏢 Ownership Certificate
A stock (also called a share or equity) represents partial ownership in a company. If a company has 1,000,000 shares outstanding and you own 1,000, you own 0.1% of that company. As an owner, you have claims to:
- Proportional profits: When the company earns money, you benefit through rising stock price or dividends
- Voting rights: Most common shareholders can vote on major company decisions
- Residual claims: If the company is sold or liquidated, you get your proportional share (after creditors)
💡 Common vs Preferred Stock
Common Stock: What most people buy. Voting rights, variable dividends, more upside potential.
Preferred Stock: Fixed dividends, paid before common stockholders, usually no voting rights. Behaves more like a bond.
Why Do Companies Issue Stock?
Companies sell shares to raise money (capital) without taking on debt. Unlike loans that must be repaid with interest, equity financing doesn't require repayment—but it does dilute existing owners' shares.
Companies use raised capital for:
- Expansion: Opening new locations, entering new markets, increasing production
- Research & Development: Creating new products, improving existing ones
- Acquisitions: Buying other companies to grow faster
- Debt repayment: Reducing interest obligations
- Working capital: Day-to-day operational needs
💡 IPO Example: From Private to Public
When Airbnb went public in December 2020:
- They sold 51.5 million shares to the public
- IPO price: $68 per share
- Raised: ~$3.5 billion for the company
- First-day close: $144.71 (113% gain)
- Early employees and investors could finally sell their shares
This process transforms a private company into a publicly-traded one, with shares anyone can buy or sell.
The Primary vs Secondary Market
📤 Primary Market
Where NEW shares are sold directly by the company to investors.
- Initial Public Offerings (IPOs)
- Secondary offerings (existing public company sells more shares)
- Money goes TO the company
🔄 Secondary Market
Where EXISTING shares are traded between investors. This is what we typically call "the stock market."
- NYSE, NASDAQ trading
- Money goes between investors, not to the company
- Where you buy stocks through your broker
Major Stock Exchanges
Stock exchanges are regulated marketplaces where stocks are bought and sold. They provide:
- Liquidity: Ability to buy/sell quickly
- Price discovery: Fair prices through supply and demand
- Transparency: Public pricing and trading information
- Regulation: Rules protecting investors
🇺🇸 NYSE (New York Stock Exchange)
World's largest by market cap (~$25 trillion)
Founded in 1792. Traditional, established companies. Has a physical trading floor on Wall Street (though most trading is electronic now).
Notable listings: Coca-Cola, Disney, Walmart, Berkshire Hathaway, JPMorgan
Listing requirements: Strict—$4 minimum share price, 400+ shareholders, $100M+ market cap
🇺🇸 NASDAQ
World's first electronic exchange (est. 1971)
Heavy on technology companies. No physical trading floor—fully electronic. Known for faster trading and lower listing requirements.
Notable listings: Apple, Microsoft, Amazon, Google (Alphabet), Meta, Tesla, NVIDIA
Listing requirements: More flexible than NYSE, attracting younger tech companies
🌍 Global Exchanges
| 🇬🇧 LSE (London) | Europe's largest, $3.5T+ market cap |
| 🇯🇵 TSE (Tokyo) | Asia's largest by market cap |
| 🇨🇳 SSE (Shanghai) | China mainland, restricted foreign access |
| 🇭🇰 HKEX (Hong Kong) | Gateway to Chinese companies |
| 🇮🇳 BSE/NSE (India) | Growing emerging market exchanges |
| 🇩🇪 Frankfurt | Major European exchange, DAX index |
How Stock Prices Move
Stock prices are determined by supply and demand in real-time. Every transaction requires a buyer and seller agreeing on a price. The "price" you see is the last traded price.
The Bid-Ask Spread
- Bid: Highest price buyers are willing to pay
- Ask: Lowest price sellers are willing to accept
- Spread: The difference between bid and ask
Example: AAPL bid: $149.95, ask: $150.00, spread: $0.05
Tight spreads (small difference) indicate high liquidity. Wide spreads mean less liquidity and higher trading costs.
📈 Price Goes UP When:
- Strong earnings: Company beats profit expectations
- Positive guidance: Management raises future forecasts
- Analyst upgrades: Wall Street raises price targets
- Industry tailwinds: Sector-wide positive trends
- Macro bullishness: Strong economy, low interest rates
- Short squeezes: Short sellers forced to buy back
- Index inclusion: Added to S&P 500 or major index
📉 Price Goes DOWN When:
- Missed earnings: Profits below expectations
- Lowered guidance: Management reduces forecasts
- Analyst downgrades: Wall Street cuts ratings
- Negative news: Lawsuits, scandals, product failures
- Macro fears: Recession, rising interest rates
- Sector rotation: Money flowing to other sectors
- Insider selling: Executives selling shares
Trading Hours
🕐 US Markets (NYSE, NASDAQ) - Eastern Time
| Pre-Market | 4:00 AM - 9:30 AM | Lower liquidity, wider spreads, reacts to overnight news |
| Regular Hours | 9:30 AM - 4:00 PM | Best liquidity, tightest spreads, most volume |
| After-Hours | 4:00 PM - 8:00 PM | Earnings reactions, lower liquidity |
Closed: Weekends and major US holidays (New Year's, MLK Day, Presidents Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving, Christmas)
⚠️ Extended Hours Trading Risks
- Lower liquidity: Fewer participants = harder to execute trades
- Wider spreads: You pay more to buy and receive less when selling
- Higher volatility: Prices can swing wildly on low volume
- Not all stocks trade: Some have no pre/after-market activity
Best practice: Trade during regular hours unless you have a specific reason (like responding to earnings).
Key Market Participants
| Participant | Description | Market Impact |
|---|---|---|
| 🧑 Retail Investors | Individual traders like you, trading personal accounts | Growing but still small (~20% of volume) |
| 🏛️ Institutional Investors | Pension funds, mutual funds, hedge funds, insurance companies | Control ~80% of market, move prices significantly |
| 🏢 Market Makers | Firms providing liquidity by always quoting bid/ask prices | Essential for market functioning, profit from spreads |
| 🏦 Brokers | Facilitate trades between buyers and sellers | Fidelity, Schwab, TD Ameritrade, Robinhood |
| 🤖 Algorithmic Traders | Computer programs executing strategies at high speed | ~60-70% of daily volume, increase efficiency |
| 🦔 Short Sellers | Bet against stocks, borrow and sell hoping to buy back lower | Provide price discovery, can trigger squeezes |
Understanding Market Cycles
Markets move in cycles, driven by economic conditions, investor sentiment, and corporate earnings:
🐻 Bear Market
20%+ decline from recent high. Fear dominates. Usually 6-18 months. Best buying opportunities for long-term investors.
📈 Recovery
Market bottoms, starts climbing. Skepticism high. Early investors rewarded. Often fastest gains.
🐂 Bull Market
Sustained uptrend, optimism grows. Typically lasts 3-10 years. Most money is made here.
🔝 Euphoria/Top
"This time is different" mentality. Excessive risk-taking. Valuations stretched. Precedes bear market.
💡 Historical Perspective
Despite crashes, bear markets, and recessions, the S&P 500 has averaged ~10% annual returns over the past 100 years. Staying invested through cycles has been the most reliable path to wealth. Time in the market beats timing the market.
Key Takeaways
- Stocks represent ownership in a company—you're a part-owner, not just a trader
- Companies issue stock to raise capital without taking on debt
- The secondary market (exchanges) is where you trade existing shares with other investors
- NYSE and NASDAQ are the major US exchanges, each with different characteristics
- Prices move based on supply and demand, influenced by earnings, news, and sentiment
- Regular trading hours (9:30 AM - 4:00 PM ET) offer the best liquidity
- Institutional investors dominate volume, but retail impact is growing
- Markets move in cycles—understanding them helps manage expectations and emotions