So you want to learn about the stock market…but where do you start?
For stock market beginners, the financial industry can be really complicated. Investors, brokers, traders, lenders, borrowers, advisors, companies, banks, stocks, shares, funds, prices…is your head spinning yet?
Thankfully, you came to the right place. For stock market beginners, it's important to start broad and then narrow in on details.
So first, we’ll review the history of the financial industry and how it’s structured. Then, we’ll take a look at the stock market and dig deep into how it functions. We’ll talk major U.S. stock exchanges, and their participants, to bring it all back out into the real world.
Make sure to stick around, because at the end of the article we're going to tell you the best stock brokers for stock market beginners, and we'll also clue you in on how stock market beginners can get the best stock picks.
So strap in, because we’re about to skydive into the world that all the big wigs on Wall Street – with their fancy tie clips and pinstripes – don’t want you to understand.
The Financial Industry for Stock Market Beginners
From bartering, metals and gold to paper bills and credit, money has always been around, albeit in many different forms.
Money was created out of a need to trade goods and services between one another. People always have needs. They need food to eat, clothes to wear, and shiny sports cars to…look cool. OK, some of our “needs” are more like “wants”. But either way, people look for ways to satisfy their demands.
Way back when, people traded goods in order to get what they needed, by giving up what they had. Let's say, I trade you a goat for a gallon of milk. But not all products and services are tradable. For instance, you wouldn’t trade wheat for electricity. So, we turn to money.
Money is the middleman. Money takes care of the transaction between buyers and sellers.
But as our world has developed and grown more complex, so has the meaning and purpose of money. We're no longer dealing with shepherds bartering sheep. Today we have multinational corporations that handle millions and billions of dollars. In order to handle this evolution, we needed a way to organize it.
Enter the financial industry.
In a nutshell, the financial industry is all about managing money: investing it, growing it, saving it and ultimately spending it.
The stock market is at the centre of all this, where people (investors) and businesses meet to make transactions and respectively manage their money.
Well, in 1602, a man named Johan van Oldenbarnevelt decided to start a company that would eventually grow to almost the same size as his last name. This early megacorporation was called the Dutch East India Company. (think Walmart’s great, great, great, great grandparent). Johan’s idea, one of the reasons the company became so successful, was to offer shares to investors in exchange for a portion of the company’s profits.
Johan, the first stock market beginner, created history. Now companies could raise money without debt. Instead, through the stock market, they issue shares of their company to the public in what is known as an Initial Public Offering (IPO). Investors buy and sell these shares (or stocks) to one another on the stock exchange, thus making stock prices move up and down. If there are more people buying a stock than people selling it, the price goes up with the demand. If more people are selling than there are people buying a stock, that’s a sign that the company is unfavorable to own and the stock price drops.
The stock market is mutually beneficial to businesses and investors because:
- Companies raise money to (try to) make their businesses grow
- Investors invest in businesses to (try to) make their money grow
Starbucks and the Stock Market
Pumpkin spice latte jokes aside – we all secretly love Starbucks. But let’s say for a second that you’re obsessed.
In order to buy your daily cup of coffee, you need money. You make a pretty nice income from your job as a Coffee Critic, but you’d like to have some extra disposable income so that you can afford your daily cup of Joe (You’d think as a coffee critic, they’d supply you with free coffee. But such is life…) You decide to grow your money by investing it, in the stock market.
Starbucks understands that you (and millions of other people all around the world) have a demand for a daily cup of coffee. In order to satisfy that increasing demand, Starbucks needs to grow; and they need money to do that. The company needs to buy more beans, hire more employees, open new stores, etc. So, in order to raise this money, they issue stock to investors on the stock market.
This means that they cut up the company into millions of (figurative) pieces. They sell these little pieces of the company, known as stocks, to people like you and me. If you own a stock, you own a little piece of the company.
Since you love Starbucks so much, you believe that they’ll successfully grow and satisfy more peoples’ pumpkin spice addictions. You think they’ll buy fresh beans, hire skilled employees, and open trendy new stores. So you decide to buy Starbucks’ stock. This means that you own a little piece of the company. If Starbucks grows and makes more money, your money grows along with it.
Want to add Starbucks to your Wall Street Survivor portfolio? Click here.
Looking to buy your first stock? Here’s the best place to start!
Now let’s look at the places where millions of these transactions take place each and every day: stock exchanges.
Stock Market Exchanges for Beginners
Stock exchanges facilitate stock trading among investors – they give investors the ability to buy and sell their shares. That’s why stock prices are constantly changing. If more people are selling (and therefore trying to get rid of) a stock than those buying it, the stock price will drop. If more people want to buy a stock than people selling it, the stock price will rise. Stock exchanges bring all these investors together, so that trades happen in a central and regulated place.
There are hundreds of stock exchanges all over the world. In the U.S., the top stock exchanges are the New York Stock Exchange (NYSE), the NASDAQ, and the American Stock Exchange (AMEX). Each of these exchanges have different companies trading on them. For example, NASDAQ is known for technology companies. Most of the tech stocks, especially in the US, trade on the NASDAQ stock exchange.
A lot of today’s trading takes place online, rather than on trading floors on Wall Street. But that doesn’t mean stock exchanges lose any importance. Even though it all takes place online, each and every trade placed has to go through a stock exchange in order to match buyers and sellers together. This is called the Electronic Communication Network (ECN), which connects traders and brokers over the Internet instead of on the trading floor.
Next we’ll go through the different type of investors that are trading on these stock exchanges…
There are two types of investors out there: Institutional and Retail.
Institutional investors are large firms like banks, investment companies, mutual funds or hedge funds that invest pools of money on behalf of their investors. They make up the majority of the volume (number of shares traded) on the stock market. Because some of these firms are so large, their trades have a significant impact on the share price of a company. Institutional investors are sometimes referred to as “smart money” (but usually only by other institutional investors).
A Retail investor is…well…you. It refers to someone who puts money in the market for themselves: an individual investor. Since the financial crash in 2008-2009, there has been an emergence of “retail investors”. People have stopped trusting big investment banks and funds with their money, and choose to learn how to become financially independent and in control of their own money (kind of like what you’re doing right now!)
Another reason for this surge of retail investors is that online discount brokerages such as E*TRADE and TD Ameritrade make it easier and cheaper for the individual than ever before, in terms of learning, in terms of trading, and in terms of handling one’s shares in a way that feels direct, real-time — and fun.
The following step will break down the services of a broker or brokerage firm, and tell you about some of the top online brokerages out there.
Brokers & Brokerage Firms
Unfortunately, you can’t buy stocks on Amazon (not yet at least, right Bezos?). For now, it’s a bit more complicated than that…
Buying a stock is more like buying a house. Most people don’t use Amazon to buy a house. They hire a real estate agent who knows the housing market and works with other real estate agents to find houses for sale./p]
Stockbrokers and brokerage firms are like the real estate agents of the stock market. Brokers buy and sell stocks on behalf of investors on the stock exchange.
There are a number of types of brokers. Full service brokers will not only perform the trades for you but will also manage your portfolio for you and give you trading advice. Other brokers, such as discount brokers, won’t give you any advice at all. They’ll just do what you ask of them.
The most important thing to look at when choosing a broker is the structure of their fees. Brokers charge investors in various ways, depending on the type of services you’re looking for.
List of Brokerages
Many brokerages offer their services online, so you can trade directly from your computer without any hassle. Here are a few online brokerages stock market beginners can use to get started:
Robinhood is an app that needs no introduction. Founded in 2013, Robinhood raised $539 million in venture capital funding. The discount broker burst onto the scene in 2015. Currently, the company boasts over 5 million users. That amount exceeds that of popular discount broker E*Trade. What makes Robinhood so popular? The company provides fee-free trading. If you are an experienced trader…you know fees can add up fast. Robinhood eliminates this cost. The service proves to be one-of-a-kind by cutting out nearly all costs associated with investing. For this reason, we think Robinhood is the best broker for stock market beginners.
So How Do I Open a Robinhood Account and Get up to $1,000 in FREE STOCK?
To open a Robinhood account, all you need is your name, address, and email. If you want to fund your account immediately, you will also need your bank account routing and account number.
As its current promotion, Robinhood is giving away a FREE STOCK (valued at $5 to $500) to anyone that opens a new account this month if you click on the promo image below. Then, once you open and fund YOUR account with at least $10, you will receive more free stock (again valued at $5 to $500) for referring your friends and family. The more people you refer, the more free stock you get. Click on this promo below to start your Robinhood account application and get your first FREE stock.....
Bonus Tip: Use this link to get a free stock (up to $500 value) when you open and fund your account with at least $10: sign up for Robinhood today, you'll get a free stock (up to $500 value!) FURTHERMORE, for each friend that you refer, you will receive ANOTHER free stock valued at up to $500. This is perfectly legit and you WILL get more free stock for every friend or family member you refer.
Why do they give away so much free stock? Because they spend their advertising dollars this way instead of buying TV, radio, print, or online ads! They WANT you to refer friends!
You can use www.StockBrokers.com to compare special offers, commission rates, and other services of more online brokerages to find the perfect one for you. (Don't worry, you can click www.StockBrokers.com and it will open a new tab so you won't lose your place in this course.)
FIRST STEPS TO FINANCIAL SUCCESS:
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