Understanding stock market basics can be hard to do.  There is an enormous amount of information floating out there and if you’re a novice investor, it can be very daunting to try to sort it all out, or even to know where to begin.

So for those of you who are new to investing, let me give you an introduction to the stock market 101.  This is a guide to the stock market for beginners.

First of all, the stock market is a financial exchange where buyers and sellers get together to trade shares or stock in public companies.  Public companies issue shares of ownership in their company.  Some may have 1,000 owners, some may have 1 million owners.  In either case the owners are said to own stocks in that company.

Those owners can freely sell their share of the company to a buyer for the market price.  Or they can buy additional shares in that company or in another company.  The stock market gives investors and traders an avenue to do this freely, efficiently and it streamlines this whole process.

Terms and Definitions

Here are some terms and definitions you will need to know to understand what’s going on in the market.  You can find these terms and learn more abou them in stock market 101 books that I will eventually do a post on.  In the mean time, here are some of the more important ones.

The Dow – When a CNBC reporter refers to the Dow, she is referring to the Dow Jones Industrial Average.  This is the average of the share price of 30 of the largest and most influential stocks on the New York Stock Exchange.  The Dow typically is looked at as an indicator of the state of the US economy.

S&P 500 Index - This is another composite of companies compiled by a credit rating agency called Standard & Poor’s, hence the S&P.  The 500 part refers to how many companies are included in this index.  S&P has a set of criteria to pick the 500 most important companies in the US.  This again is used to indicate the health of the US economy and stock market.

Share Price – Refers to the price of a single share of a company.

Market Cap – Also known as market capitalization, this is a measurement of the company’s size.  It’s calculated by taking the share price and multiplying it by the number of outstanding shares.  The 3 main categories of market caps are large-cap, mid-cap and small-cap.

P/E Ratio – This is the price per earnings ratio.  It gives an indication of how much real money a company is earning relative to it’s share price.  If their P/E is high, that means the price is way higher than what they are earnings, which means there is a market expectation that this particular stock will go up at some point in the future, the earnings will rise significantly, or both.

Stock Broker – Everyone needs one of these in one form or another to buy and sell stocks.  A broker trades shares on your behalf and you pay them a commission each time you do it.  Back in the old days, you’d have to call them on their landline to place an order.  You can still do that, but most people have an online brokerage account that they trade from these days.

Mutual Fund – This is when a money manager puts together an investment portfolio and let’s other people get in on it.  It’s like if you were picking stocks to invest in and other people started to ask you to do it for them.  You are basically paying a professional to invest your money for you and you pay them a management fee.

Investment Portfolio – This is your overall basket of stocks, bonds and other assets that you have invested in.  If I own shares in GE, Microsoft and Coca-cola, I would say that those stocks are in my investment portfolio.

Diversification – This is an important concept to understand when you are developing your investment strategy.  Diversification is the idea that you don’t put all of your eggs in one basket.  By buying a variety of stocks, bonds and other kinds of assets, you are diversifying your risk.  If one goes down the tube, you have other assets to make up for it.  It is unlikely that all of your assets will tank.  And if one does extraordinarily well, it will make up for the losses.  But you have no way of knowing which ones will do well and which ones won’t, so you buy all different kinds.

Before beginning to invest in the stock market, you should get expert investment advice from a financial adviser.  I would recommend a fee based financial advisor because they won’t have incentive to try to get you to buy or sell so they can get commissions.  In any case, a qualified adviser will have licenses like the Series 7, 6, 63, 3, etc to indicate they can broker securities for you.  Also, make sure they are a registered investment adviser with your state.