Guide to stock market

A quick guide to get into the world of stonks

By Lonyin Chan 17/08/2020

(Image credit: The Economic Times)

***Please be advised that I am not giving any financial or investing advice or telling you how to spend your money. This article is mainly just a guide and use at your own risk***


In this guide I will be explaining things in the world of the stock market. This guide is only a quick glimpse to start you off in learning about the stocks market so as always, do further research!

What are Stocks?

Stocks (also known as shares) are an investment that represents ownership in a company allowing you to become a part-owner of that company. Companies sell stocks in order to raise money with two types of stocks, the common stock that allows the stockholder to a share of the company's profits/losses and a preferred stock that comes with a dividend (More on this later).

How do you make money off stocks?

(Image credit: Wikipedia)

As there are two types of stocks, there are two main ways of making money, firstly you can profit from owning stocks where the price per stock/share increases. The second way is through dividends where the company pays its stockholders a sum of money out of its profits where the sum is determine by the dividend yield and the number of stocks you own in the company. One thing to note is that not all companies give out dividends as this is entirely optional and usually depends how well the company is doing.

How Stock prices fluctuate

The stock market works on the supply and demand idea where the price will go down when there are more sellers than buyers and vice versa. This could be confusing the new investers as the company's performance does not directly correlate with its stock price. What tends to happen is that the stock price goes up/down depending on the reactions of investors such as a new product release or the recent drop due to COVID-19 lockdowns in many countries.

Market cap

Some of you may of heard of tesla's worth shooting up, this is due to its market cap of $342B. This is one way to judge how well a company is doing by evaluating its market cap which is the total value of all the stocks similar to networth (The value of all assests such as stocks that a person owns). You can tend to evaluate the company with other similar-sized companies in its industry with three general groups:

  • Small-cap: Market cap of $300 million to $2 billion
  • Mid-cap: Market cap of $2 billion to $10 billion
  • Large-cap: Market cap of $10 billion or more

Stock splits

Stock splits is one thing you should know but rarely happens. This is when a company increases its total number of stocks/shares by dividing the ones it currently has which is done by a ratio such as a 4-to-1 ratio.

For example, using the 4-to-1 ratio, when you already own 50 shares worth $300 per share. You will have 200 shares worth $75 each after a stock split. This only changes the number of shares you own of a company where the overall value that you own remaing the same. Stock splits usually occur when the share price is at such a high price that smaller investors cannot own the share where after a stock split it becomes more accessible and appealing. Although some brokerages(More on this later) offer fractional shares which allow you to own part of a share at the corresponding price.


(Image credit: Fool)

Dividends are quarterly or yearly payments that companies give to their shareholders. Dividend investing is a investment strategy that usually means that invester will build up their portfolio in such a way that they generate a passive income for retirement. Another way of using dividends is by investing money gained back into the company commonly referred as compound interest. With this method, investors can build up their wealth exponentially after a long period of time as they earn interest on the interest they just invested.

However one thing to look out for is that companies can increase/decrease the amount of dividends they pay to stockholders at anytime. This makes Blue-chip stocks more appealing as these stocks come from companies that have a long history of paying consistent dividends regardless of economic conditions with examples including Coca-Cola, Walt Disney and Apple.

Index Funds and ETFs

One way of reducing risk from investing is through index funds and ETFs although the gains are also low. Both Index funds and ETFs are common in that they follow a particular index (A list of companies that are usually the top of the whole market or a certain industry) by spreading your investment over the index. The difference between index funds and ETFs is that an index fund is when all of the money from multiple investors in put into a pool which is then invested into all of the companies in the index while ETFs act more like stocks allowing you to buy each ETF identically to a stock which makes ETFs more flexible in buying and selling. This method is low risk as if the share price of one company falls, it is usally counteracted by the share price of another company raising.

How to buy stocks

To buy stocks, you need to go through a broker who arranges an agreed upon price between the seller and the buyer. This can be done through a brokerage platform such as Trading 212. The main difference between brokerages is the amount of stocks they offer and the fees they charge such as the commission per trade (investment).

Stock Exchanges

(Image credit: Business insider)

One last thing to know about is stock exchanges. A stock exchange is a centralised location in which companies, governments and investors are brought together so that the brokers can execute buy and sell orders for stocks.

Last points

As a general rule of thumb, the higher this risk with a stock, the higher the potential gains are with risk being high likely you are to lose money. When losing money on a stock, remember that you can always hold on to the stock until it has recovered to sell it off unless you have no confidence with the stock price. One last noteable thing to know is delisting, this is when a stock is taken off the stock exchange and all of its stocks are gone, this is a rare occurrence as it happens when a company goes bankrupt or reports false financial information and generally delisted stocks have a period where stocks can be sold for the price they were delisted at although this does not happen in all case. Remember that this is a basic guide into the stock market and you should do more research before investing as your capital (money) is at risk.

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Made with lots of ☕ by Lonyin