Understanding How Do Stock Shares Work and Investing Basics

Stock shares can be a bit confusing at first, but understanding the basics can help you make informed investment decisions. Essentially, a stock share represents ownership in a company.

When you buy a stock share, you're essentially buying a small piece of that company. This means you become a shareholder and may be eligible to receive dividends or voting rights.

A company's stock price is determined by the supply and demand of its shares in the market. If more people want to buy shares than are available, the price tends to rise. Conversely, if there are more shares available than buyers, the price may drop.

Investing in stocks involves taking on some level of risk, as the value of your shares can fluctuate. However, this risk can also lead to potential rewards, as companies with strong growth prospects can see their stock prices increase over time.

Choosing a broker can be a daunting task, but it's a crucial step in buying and selling shares. You can use an online broking service or a full service broker to facilitate the process.

There are various types of brokers to consider, including full-service brokers, discount brokers, online brokers, roboadvisors, and Direct Stock Purchase Plans (DSPPs). Full-service brokers offer a wide range of services, including investment advice and portfolio management, but charge higher fees.

You can find a broker that suits your needs by using the Australian Securities Exchange (ASX) find a broker tool. Some popular broker options include Merrill Lynch, Morgan Stanley, Charles Schwab, Fidelity, E*TRADE, Robinhood, Betterment, and Wealthfront.

Here are the different types of brokers in a nutshell:

Choosing a broker can be a daunting task, but it's an essential step in investing in the stock market. You can use the Australian Securities Exchange (ASX) find a broker tool to locate a broker that suits your needs.

There are different types of brokers to consider, including full-service brokers, discount brokers, online brokers, roboadvisors, and direct stock purchase plans (DSPPs). Full-service brokers offer a wide range of services, including investment advice, retirement planning, tax guidance, and portfolio management.

Full-service brokers typically charge higher fees but provide personalized service and expert advice. For example, Merrill Lynch and Morgan Stanley are full-service brokers. Discount brokers, on the other hand, offer fewer services but charge lower fees.

Discount brokers provide basic trading services, research tools, and customer support. This option is suitable for self-directed investors who prefer to make their own investment decisions. Examples of discount brokers include Charles Schwab and Fidelity.

Online brokers operate primarily through online platforms, offering a convenient and cost-effective way to trade stocks. They provide a range of tools and resources for self-directed investors. Online brokers often have lower fees compared to traditional brokers and may even offer commission-free trading.

Here are the main differences between the types of brokers:

Roboadvisors use algorithms to create and manage investment portfolios based on risk tolerances and goals. They offer a hands-off approach to investing with lower fees compared to human advisors. Roboadvisors are ideal for investors seeking a simple and automated investment solution.

Direct stock purchase plans (DSPPs) allow you to buy shares directly through the company, without using a broker. While there are no brokerage commissions, the company may charge an administration fee.

The bid-ask spread is a crucial factor to consider when trading stocks. It represents the difference between the highest price a buyer is willing to pay and the lowest price a seller is offering.

A tight bid-ask spread indicates a liquid market, making it easier to buy and sell stocks. This is often seen in popular stocks with high trading volumes.

A wide bid-ask spread, on the other hand, suggests an illiquid market, making it harder to trade stocks. This can result in larger price movements and increased volatility.

If the bid-ask spread is wide, it may be more challenging to execute trades quickly and at a fair price. This can be frustrating for traders who need to act fast.

In general, a tighter bid-ask spread is preferable for traders, as it indicates a more efficient market with better liquidity.

You can choose to use an online broking service or a full service broker to buy and sell shares. Full service brokers will do the trading for you and can advise you on what to buy or sell.

Fees for full service brokers are a percentage of the value of a trade, and typically, the larger the transaction, the lower the percentage you pay. For example, the fee on a transaction of up to $5,000 may be 2.5%, while for a large trade, it may be 0.1%.

There are different types of brokers to consider, including full-service brokers, discount brokers, online brokers, roboadvisors, and direct stock purchase plans. Full-service brokers offer a wide range of services, including investment advice and portfolio management, but charge higher fees.

Full Service Brokers are a type of broker that offers a wide range of services, including investment advice, retirement planning, tax guidance, and portfolio management. They typically charge higher fees but provide personalized service and expert advice.

Their fees are a percentage of the value of a trade, and the larger the transaction, the lower the percentage you pay. For example, a fee on a transaction of up to $5,000 may be 2.5%, while a large trade may be as low as 0.1%.

Some examples of Full-Service Brokers include Merrill Lynch and Morgan Stanley, who offer a wide range of services and expert advice, but at a higher cost.

Here are some key things to keep in mind when considering a Full-Service Broker:

Overall, Full Service Brokers can be a good option for those who want personalized service and expert advice, but are willing to pay a higher fee for it.

To get a clear picture of an IPO, you need to read the prospectus. It's like a roadmap for investors, containing essential details about the company and the float.

The prospectus must be lodged with ASIC, so check their Offer Notice Board to confirm. ASIC is the Australian Securities and Investments Commission, responsible for regulating the country's financial markets.

The prospectus will tell you about the features of the shares on offer, including how many are available for sale and how to apply to buy them. This is crucial information for investors.

Company information, such as its operations and financial position, is also outlined in the prospectus. This gives you a better understanding of the company's strengths and weaknesses.

The prospectus will also highlight the risks associated with the offer. It's essential to be aware of these risks before investing.

A managed fund is a type of investment where you pool your money with other investors to buy a range of shares and other assets.

You don't have to make the buy and sell decisions yourself, as a professional fund manager takes care of it for you.

Fees for managed funds can be higher than on other indirect investments, depending on the type of fund you choose.

You can buy fund units, which is a convenient way to buy shares without having to make all the decisions yourself.

By investing in a managed fund, you can diversify and reduce risk, as the fund manager spreads your money across different assets.

Managed funds are a popular choice for people who want to invest in the stock market but don't have the time or expertise to make their own investment decisions.

Once you have your brokerage account and budget in place, you can start thinking about how to place your stock trades. Market orders are a great option, as they allow you to buy or sell a stock as quickly as possible at the best available price.

Market orders are straightforward: they simply buy or sell a stock at the current market price. Limit orders, on the other hand, give you more control over the price at which you buy or sell. You set a specific price, and the order will only execute if the stock reaches or falls below that amount.

To illustrate the difference, let's consider a limit order. This type of order is used when you want to buy or sell shares at a specific price, or better. If buying, you set the maximum price you're willing to pay, and if selling, you set the minimum price you're willing to accept.

Here are the key differences between market and limit orders:

When trading stocks, it's essential to understand the different types of buy and sell orders available to you. Market orders are used when you want to accept the current market price for a share, and they're more likely to execute than limit orders.

A market order can be a bit like a "best offer" scenario, where you pay the highest asking price when buying or accept the highest bid when selling. This can result in a transaction cost due to the bid-ask spread.

You can also use a limit order, which allows you to set a specific price you're willing to pay or accept for a share. This can be a good way to avoid overpaying for a stock, but it may not execute if the market price doesn't reach your limit.

Here are the key differences between market and limit orders:

There are also other types of orders, such as 'Good til cancelled' (GTC) and 'Good til expiry' (GTE) orders, which stay open in the market until cancelled or a specific date. These orders can give you priority in the order queue, but they also come with the risk of experiencing significant price swings due to market volatility.

A Good for Day (GFD) order is a type of order that stays open in the market for one trading day.

This order type avoids exposure to overnight price swings and unexpected loss, which can be a relief for traders who don't want to risk their investments.

The unexecuted portion of the order, if any, is cancelled at the end of the day.

You can own shares directly or indirectly through a managed fund.

Buying shares makes you a part-owner of a company, and as a shareholder, you can receive dividends and other benefits.

You can sell your shares directly by placing a trade online or contacting your broker, but you'll pay a fee each time you make a trade.

Selling shares involves exchanging the legal title of ownership, and settlement for the sale and transfer of ownership happens two business days after the trade.

After settlement, the sale proceeds are transferred into your bank account.

If you hold shares indirectly through a managed fund, you can sell them by selling your units in the managed fund, but be aware of any withdrawal costs.

Stock performance can be a rollercoaster ride, but it's essential to understand the underlying factors that influence it. Strong demand from investors typically results in an increase in a stock's share price.

The performance of an individual stock is also affected by the broader stock market and the economy as a whole. If interest rates go up, some investors might sell off stock and use that money to buy bonds.

Stock prices will be low enough to attract investors again at a certain point, offering the potential to make a profit and reverse any losses. This cyclical pattern of strength and weakness in the stock market recurs continually.

The S&P 500 has grown about 10.5% per year since it was established in the 1920s, and this can be used as a barometer for market growth.

Common stock is the type of stock that most publicly traded companies issue. This type of stock gives shareholders the right to share in the company's profits and losses. The share price of common stock can fluctuate over time due to investor demand and market conditions.

There are different classes of shares, often designated by letters of the alphabet, such as A and B. These different classes of shares can have different voting rights, dividend policies, or trading prices. Some companies may also offer a separate class of stock for a division that was a well-known company before an acquisition.

Some shares, known as nontraded shares, are reserved for company founders or current management. These shares often have super voting power, allowing a group of shareholders to own less than half of the total shares but control the outcome of shareholder votes.

Common stock is the most widely traded type of stock. It represents ownership in a company and gives shareholders the right to receive dividends and participate in the company's growth.

If you hold common stock, you're in a position to share in the company's success or feel the lack of it. The share price rises and falls all the time, reflecting investor demand and the state of the markets.

Common stock doesn't guarantee a fixed dividend payment, unlike preferred stock. The issuing company may pay dividends, but it doesn’t have to, and the amount of the dividend isn't guaranteed.

The price of common stock can fluctuate significantly, with the potential for both significant gains and losses. This makes it a more volatile investment option compared to preferred stock.

Share buy-backs are a way for companies to repurchase their own shares from existing shareholders. This can be a good option for investors who want to sell their shares without incurring a brokerage fee.

A company might offer to buy back its shares for various reasons, such as distributing money back to shareholders or reducing administrative costs.

If you receive a buy-back offer, it's essential to consider why the company wants to buy back its shares. This will help you decide whether to accept or decline the offer.

One reason to consider keeping your shares is if you're happy with the company's prospects. If you'd rather sell, selling via a buy-back offer can be a convenient and cost-effective option.

Classes of stock can be complex, but understanding the basics can help you make informed decisions about your investments.

Certain companies have different classes of shares, designated by letters of the alphabet, often A and B.

These classes can have different characteristics, such as trading at different prices, having different voting rights, or different dividend policies.

For example, a company might offer a separate class of stock for one of its divisions that was a well-known company before an acquisition.

Nontraded shares are generally reserved for company founders or current management, and often come with restrictions on selling them and super voting power.

Here are some key differences between classes of stock:

Keep in mind that short-term trading can come with additional costs, including taxes on profits made from selling stocks held for less than a year.

Capitalization is a key concept to understand when it comes to companies. Market capitalization, or market cap, is a measure of a company's size, calculated by multiplying the number of outstanding shares by the current market price.

Market cap is often used to categorize companies as large-cap, mid-cap, or small-cap. Large-cap companies are valued at over $10 billion, while mid-cap companies fall between $2 billion and $10 billion. Small-cap companies, on the other hand, are valued at less than $2 billion.

There's no one-size-fits-all definition for these categories, but these are some general guidelines. You might also come across micro-cap companies, which are even smaller than other small-cap companies.

The share market is a fascinating place where people can buy and sell shares of companies. This makes them part-owners of those companies.

You can own shares yourself or pool your money with others through a managed fund. This collective investment approach can be a great way to diversify your portfolio.

The concept of trading company shares has been around for thousands of years, with the Roman Republic having a system for trading shares in publicani companies.

Companies may offer new shares to the market as a way of raising capital, known as a 'float' or an 'initial public offering' (IPO).

An IPO allows companies to raise capital from a large number of investors, increasing their financial resources.

This process involves listing the company's shares on a stock exchange, such as the New York Stock Exchange or NASDAQ, making them publicly traded.

Raising capital through an IPO can be a complex and time-consuming process, requiring companies to meet strict regulatory requirements.

Companies may choose to list their shares on a stock exchange to increase their visibility and credibility in the market.

Over-the-Counter Exchanges are a type of loosely regulated stock exchange.

These exchanges, also known as bulletin boards (OTCBB), list companies that may not meet the stricter listing criteria of larger exchanges.

Shares listed on OTC exchanges tend to be riskier because these companies often lack a proven track record or may not meet certain conditions regarding company value and profitability.

Larger exchanges typically require companies to have been in operation for a certain amount of time before being listed.

Shares listed on OTC exchanges can be more volatile, and investors should be cautious when considering these investments.

Some OTC exchanges have significant market capitalization, such as the NYSE and NASDAQ, which are among the largest exchanges in the world.

The NYSE has a market capitalization of $28.32 trillion, while the NASDAQ has a market capitalization of $26.62 trillion.

Here are the top 10 stock exchanges by total market capitalization (as of Q2 2024):

Indexes are a great way to measure the performance of the stock market. They represent the aggregated prices of several different stocks, and the movement of an index is the net effect of the movements of each component.

The Dow Jones Industrial Average (DJIA) is a price-weighted index of 30 large American corporations, which means its weighting scheme and limited number of stocks make it less reliable as an indicator of the market's overall performance.

Indexes can be broad, like the Dow Jones or S&P 500, or specific to a certain industry or market sector. Investors can trade indexes indirectly via futures markets or exchange-traded funds (ETFs), which act just like stocks on stock exchanges.

Most market indexes are market-cap-weighted, which means the weight of each index constituent is proportional to its market capitalization. The S&P 500 is a great example of this, being a market-capitalization-weighted index of the 500 largest companies in the U.S.

Some widely watched indexes in the U.S. and internationally include:

Stocks represent ownership equity in a firm, and many give shareholders voting rights, as well as a residual claim on corporate earnings in the form of capital gains and dividends.

Individual and institutional investors come together on stock exchanges to buy and sell shares in a public venue. This is where the magic happens, and share prices are determined by supply and demand.

Share prices are set by the interactions of buyers and sellers placing orders. It's a dynamic process that's influenced by a variety of factors, including market trends and economic conditions.

In essence, stock shares are a way for individuals and institutions to invest in companies and potentially earn returns through dividends and capital gains.