Module 1: Introduction to the Stock Market
What Is The Stock Market?
Lesson 1: By the end of this class, you will understand what the stock market is, how it works, and the key terms that will help you make sense of trading.
What Are The
Major Stock Exchanges?
The stock market is made up of places called exchanges. These are where people buy and sell shares of companies. In the United States, the two biggest exchanges are the New York Stock Exchange and Nasdaq.
You can think of an exchange as a very organized and highly regulated auction. Buyers come with money in hand, sellers come with stock to sell, and trades happen when their prices match. The exchange keeps everything orderly, so you know your money and the stock are secure.
When a company grows large enough and wants to offer access between their company and the market, they can register to have pieces of that company to be traded on these exchanges as long as they meet certain criteria. This opens up opportunities for the company and investors alike. Those small pieces of the company are what we call "shares".
Knowing The Difference Between...
Public vs. Private Companies
Companies can either be private or public. A private company is usually owned by its founders or early investors. You cannot buy shares in a private company unless you are part of that inner circle.
A public company is different. Its shares are listed on an exchange, which means anyone can buy or sell them. Once a company goes public, its value is determined every day by what people are willing to pay for its shares.
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Here Are Some
Important Terms You Should Know
As you start learning about the stock market, you will encounter some terms over and over. Here are a few of the most important:
Float
Float is the number of shares that are available for the public to trade.
Restricted Shares
Restricted shares are shares that company insiders hold and cannot sell right away.
Authorized Shares
Authorized shares are the total number of shares a company is allowed to issue.
Volume
Volume is the number of shares that are traded during a certain time period.
Bid/Ask
Bid and ask show the highest price someone is willing to pay for a share (bid) and the lowest price someone is willing to sell it for (ask).
Let's Dive Into
How Initial Public Offerings Work
An Initial Public Offering, or IPO, is when a private company decides to sell shares to the public for the first time. This is how a private company becomes a public company.
Investment banks usually help the company decide on the initial price and handle the paperwork. Once the IPO is complete, the stock begins trading on an exchange, and anyone with a brokerage account can buy or sell it. These moments can be extremely volatile and risky because the market hasn't yet determined a fair price for those shares and there are a lot of eyes watching it move up and down.
What About
Secondary Offerings?
A secondary offering happens when a company that is already public sells additional shares. Companies do this to raise more money for growth, paying down debt, or other projects. When new shares are issued, the existing shares are slightly diluted, meaning each share represents a smaller percentage of the company.
Because this changes the number of available shares, many investors have a reaction to this when it happens, and the price often moves suddenly (typically to the downside). It is important to note that the offering itself does not change the value of the position investors hold in their portfolio, but the reaction by other investors does when the price moves.
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