Basics of the Stock Market

You may be familiar with the idea that investing in stocks can be a great way to create wealth over time. And this is certainly true. But do you really know how the stock market works? What is the difference between a stock market and a stock exchange or stock index? Do you know what a stock is? If you're curious, here's a rundown of the basics of stock markets, stock exchanges, and stock indexes.

What Is a Stock?

A stock is a type of investment in a company. If you buy stock in a company, you are essentially saying you believe the value of that company's products or services will rise over time. That's because when we buy shares in a company, we are buying ownership of that business. When the value of that business rises, so does the value of our shares.

Stock market: A stock market is where investors can buy and sell stocks and other types of securities (such as bonds) for capital appreciation and income generation. In the U. S., there are two major stock markets: New York Stock Exchange (NYSE) and Nasdaq. With these markets, investors can easily invest in thousands of publicly traded companies based on their needs and risk tolerance levels. There are several other smaller regional exchanges around the country as well, but the NYSE and Nasdaq tend to be more popular with individual investors due to their size, liquidity levels, and trading hours.

Stock exchange: A stock exchange is an organization or facility where stocks are traded among buyers and sellers for capital appreciation or income generation purposes. In most cases, there is more than one exchange in each country; however, there are exceptions such as China, Japan, South Korea, Taiwan, Thailand, Vietnam, Indonesia, Malaysia...and so on! In China alone there are eight major exchanges including Shanghai Stock Exchange (SSE), Shenzhen Stock Exchange (SZSE), Hong Kong Exchanges & Clearing Limited (HKEX), Beijing-Shanghai Rising Assets Trading Platform (RAP), National Equities Exchange & Quotations (NEEQ) , Shenzhen Qianhai Equities Exchange (QQE), China Financial Futures Exchange (CFFEX), and SME Central Equities Trading Platform (CNCE).

On these exchanges around the world you'll find thousands upon thousands of companies listed with stocks trading every single minute by investors looking to make money through capital appreciation or dividend income generation strategies depending on what type of security they hold in their portfolio. So just think about how big China's economy is...and now consider all those other Asian countries listed above! You get an idea about how large this global financial system really is!

Stock index: A stock index is used to measure how well certain stocks within an industry or sector have performed over time.

The Dow Jones Industrial Average was created in 1896 by Charles Dow to serve as a benchmark for average industrial activities among major companies from various sectors. It was originally based on the prices of 12 stocks listed on the NYSE, but it has since grown to include 30 companies with a market cap of more than $10 billion as of December 31, 2020.

The S&P 500 is an index composed of 500 large market cap companies whose stocks are listed on the NYSE and Nasdaq exchanges and are considered representative of the stock market in general. These companies are sorted into 10 sectors within three broad industries to make for a diversified index that tracks the performance of most publicly traded stocks in the U. S.: industrial, financials, and consumer goods sectors; communications services sector; energy sector; materials sector; real estate sector; health care sector; utilities sector; information technology sector; and consumer discretionary sector.

Other popular indexes include Nasdaq-100 Index, Russell 2000 Index, NASDAQ-100 Equal Weighted Indexes, Dow Jones Global Indexes...the list goes on and on! When you think about investing in mutual funds or ETFs or starting a personal brokerage account with a discount broker like E*Trade Financial Corporation(NASDAQ:ETFC), you'll likely see all these indexes among their investment offerings as well as hundreds if not thousands of individual securities available for your investment appetite!

A stock is much more than just a piece of paper that you get when you buy stock in a company -- it is actually a share or portion of ownership in that company or corporation!

Stock certificates used to be paper certificates that represented shares until electronic trading came along. Nowadays when we buy shares or stocks we typically do so through electronic brokers by placing our trades electronically instead of receiving physical certificates like we used to back in the day!

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