Stock Market 101 For Beginners

If you want to start investing in the stock market then you need to understand the basics of stock investing.

In this article we will look at two of the most basic things you need to understand: how to recognise stock value, and how to understand how the market affects stock value.

Recognising Stock Value In The Stock Market

When you go into a shop there are set prices for different items of food. You then choose which of these items you want, and if you are willing to pay the asking price, you purchase those items.

The stock market is just like a shop. The items you see in a shop represent the companies that are available for you to choose from, and the prices you see represent the value of that companies stock.

Selecting Stock To Buy

Some items you see in a shop are similar, but vary in price. One may be cheaper, while the other is more expensive. The same happens in the stock market.

The price of some company’s shares are cheaper than the shares of other companies.

Which one you choose to buy is dependent on many factors, although as an investor you are generally looking to purchase shares at the lowest price possible.

However with that said there is no point purchasing something just because it is cheap. For example, you wouldn’t buy a moldy loaf of bread just because it was much cheaper than a fresh loaf would you?

Quality Of Stock

In the stock market some companies are of high quality, whilst others are of low quality.

Low quality companies are usually poorly managed, and have limited future potential in terms of expansion and revenue increase. High quality companies are well managed, and will probably expand in the future.

Generally speaking, low quality companies have a low stock value, and high quality companies have a high stock value.

However it is possible for a high quality company to have a low stock value, and a low quality company to have a high stock value.

So whilst you do want to look for the cheapest stocks possible, you also want to make sure you are buying quality. Or at least something which has the potential to become a quality company sometime in the future.

How Market Capitalisation Affects Stock Value

In the stock market you can determine the value of a company (the value of its stock) in many different ways.

One of the simplest ways to measure the value of a companies stock is to look at the company’s market value. This is also known as market capitalisation or market cap.

What Is Market Capitalisation?

Market capitalisation is determined by multiplying all the outstanding shares of a stock by the price of a single share.

So to calculate the market cap you just multiply the number of shares outstanding by the current share price.

For example, if a company has 2 million shares outstanding at a share price of $20, the market cap would be $20 million.

Types Of Market Caps

In the stock market there are different types of market caps depending on the value of a company.

Below you will find a brief description of each of the different types of caps.

Stock Market Micro Cap (below $250 million)

Micro caps include anything under $250 million. These types of stocks are considered to be very risky because they are the smallest available.

Stock Market Small Cap ($250 million - $1 billion)

Stocks in this category have the potential for future growth and are considered to be better investment options than micro caps.

Stock Market Large Cap ($5 billion to $25 billion)

Stocks in this category are usually bought up by investors who are looking for a safe long term gradual increase on their original investment. These types of stocks are often called “blue chips”.

Stock Market Ultra Cap (Over $25 billion)

These stocks represent the biggest companies in the stock market, such as General Electric or Exxon Mobile.

Investing In The Stock Market

The size of a company and/or its market value generally do not matter when it comes to the safety of your investment. But large cap stocks are usually considered to be safer than small cap stocks.

It is worth remembering however that small cap stocks have a greater potential for future growth, but this comes at a cost of an increased risk of investment.

So when investing in the stock market it is important to take market capitalisation into consideration, but do not base your investment in the stock market solely upon it.

There are many other things you need to take into consideration when investing in the stock market, which you will learn about when you learn more about investing.