5 Things to Know Before the Stock Market Opens

  • May 21, 2024
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5 Things to Know Before the Stock Market Opens

Understanding the stock market is vital for anyone interested in investing or managing their financial portfolio. Here are the”5 things stock market” everyone needs to know.

What is the stock market?

The stock market refers to a collection of markets and exchanges where regular activities of buying, selling, and issuance of shares of publicly-held companies take place. Such financial activities are conducted through institutionalized formal exchanges or over-the-counter (OTC) marketplaces operating under regulations.

It is hard to overestimate the importance of the stock market. As a reminder, it is a barometer of a country’s economy. What’s important, the stock market provides an essential function in the free market economy by facilitating access to capital for companies and investment opportunities for individuals. 

We also need to mention that each stock exchange has a set of listing requirements for companies that want to offer their shares for trading publicly. There is no shortage of stock exchanges. However, people usually hear only about the top exchanges, such as the New York Stock Exchange (NYSE) and the London Stock Exchange (LSE.) 

How stocks are traded

Stocks are bought and sold through stock exchanges, as well as through private sales. However, the vast majority of stock transactions occur through exchanges. It is recommended to remember certain details about stock exchanges, when discussing, “5 things stock market.”

For example, when you buy stock, you purchase a small part of ownership in the company, known as a “share.” 

Brokers are in charge of the transactions. Trading happens during specific hours of business days. For instance, the NYSE and Nasdaq are open weekdays from 9:30 AM to 4:00 PM Eastern Time. Prices of stocks fluctuate throughout the day based on supply and demand dynamics, which are influenced by various factors. 

For example, economic indicators, corporate performance, and market sentiment can influence stocks. 

Major market indexes

Understanding market indexes is essential to understanding how the stock market performs. Market indexes are statistical measures that show changes in the stock market. The most notable indexes include:

Dow Jones Industrial Average (DJIA): Often just referred to as “the Dow,” this index represents 30 significant stocks traded on the New York Stock Exchange (NYSE) and the NASDAQ. 

Standard & Poor’s 500 (S&P 500): This index includes 500 of the largest companies listed on the NYSE or NASDAQ. It is an indicator used by analysts and investors to determine the state of the U.S. stock market.

NASDAQ Composite: This index includes all the companies that trade on the NASDAQ and is heavily weighted towards technology stocks. 

Investors use the indexes mentioned above to track market performance and compare individual stock performance against the broader market’s performance. They also influence mutual funds, particularly index funds that aim to replicate a specific index’s performance. 

Factors influencing stock prices

We simply can’t forget about various factors regarding the “5 things stock market” everyone should know. 

Several factors can affect stock prices, ranging from micro to macroeconomic factors:

Company performance: A company’s financial health, earnings reports, and growth prospects directly impact its stock prices. Positive news, such as innovative products or bullish earnings reports, can increase demand for the stock, while negative news, like lawsuits or earnings misses, can decrease demand.

Economic indicators: Employment rates, GDP growth, interest rates, and inflation impact stock prices. For instance, high interest rates may lead to lower stock prices as they typically lead to higher borrowing costs and reduced spending.

Market sentiment: This refers to the overall attitude of investors towards a particular stock or the stock market in general. Market sentiment is influenced by news, reports, and national economic performance.

Global events: Wars, pandemics, international trade, and political events can significantly impact the market. For instance, the COVID-19 pandemic led to high volatility in global markets as businesses shut down and economies were strained. 

The importance of diversification

Diversification is a key strategy in stock investing. It involves spreading investments across various financial instruments, industries, and other categories to reduce exposure to any single asset or risk. The rationale is that a diversified portfolio will, on average, yield higher returns and pose a lower risk than any individual investment found within the portfolio.

Investors use diversification to smooth out unsystematic risk events in a portfolio so that some investments’ positive performance neutralizes others’ negative performance. The benefits of diversification hold only if the securities in the portfolio are not perfectly correlated—that is, they respond differently, often in opposing ways, to market or economic events. 

Understanding these fundamentals is vital for anyone interested in engaging with the stock market, whether a novice investor or looking to brush up on your investment knowledge. With solid knowledge of these principles, you can make more informed investment decisions.

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