Stock Market Investing Basics For Beginners

Investing in the stock market can be extremely intimidating, especially if you have never invested before. There are many terms and concepts that not only need to be learned, but mastered, before you are ever going to find consistent success in the stock market.

So let's explore a few of these basic concepts to get started because you will need a very strong foundation if you are going to be investing in the stock market for consistantly lengthy period of time. A good foundation is critical and you should not overlook the basics if you intend to make this habitual and life changing.

Let's first address what buying stock really means. Does buying a share of a company really entitle you to a piece of the company itself? No.

This is a common misconception. The reality is that what you are buying as a 'share' is really a piece of paper and nothing more. The pieces of paper you buy are treated as thought they are real shares of the company that is only to help understand the forces of supply and demand. What you are really buying are shares of the earnings. In fact, using the P/E multiple (something we will not discuss here), you quickly see that you are usually paying far more per dollar of earnings than would seem logical.

Think of buying stock like buying baseball cards. In all reality, this is exactly all you are doing. Instead of buying Sammy Sosa's rookie card, you are buying earnings potential of Nike.

Now that we understand exactly what a stock is, let's move onto a few commonly used terms.

Volume. Volume is the amount of shares being bought and sold at any given moment. Meaning, if 5,000 shares are sold in the span of a minute then at that exact minute the volume was -5,000. Another way to think of volume is as liquidity. The larger the volume the easier it is to buy and sell a given stock. This is why certain kinds of stocks, like penny stocks, are often difficult to trade because of their relatively low volume. You might make 100 times your money, but be unable to sell the stock and claim your profit if the volume is too low.

Price. The price of a stock is a reflection of many factors that really all boil down to supply and demand. If more people want a stock than is available at a particular price, then the demand out weighs the supply and the price goes up. And if fewer people want a stock than there are selling, then the supply is greater and the price goes down to encourage more buyers to step up.

Always remember that stock price is driven by an underlying supply and demand. This can be influenced by many things ranging from quarterly earnings to natural disasters.

Now let's finish off this quick primer by addressing one final term.

Sectors. If we return to the baseball card analogy, then sectors are like the teams that house the players. Imagine all the big name players suddenly join the Dodgers. Then that team will attract a lot more buyers. The stock market is the same with regards to sectors. A sector can be many different things ranging from Utilities to Technology. Really, a sector is just a category for businesses. And when the economy acts a certain way, think of that as stronger players moving to different teams and there being a subsequent shift in demand for a particular sector (or team).

Hopefully this has taught you something or helped a little light bulb go off. Remember that this is literally barely even scratching the surface of a giant iceberg of information.

Stock Market Investing goes very deep and encompasses many realms of study and theory. But before you can comprehend a masterful painting, you first have to understand the colors that will grace the canvas.

Have faith and keep learning and eventually you will be a strong investor!