Stocks

~6 mins

Stocks are the financial system's way of sharing ownership and risk. They exist because companies need money to grow and investors need ways to participate in economic success.

1) Stocks are tiny pieces of a business. Companies sell them to raise money for new products, hiring, and expansion, and investors buy them to share in profits and growth. If you own 1% of Apple, you own 1% of its assets and future earnings. This turns the stock market into a partnership between savers and builders.

Related: Stock | Share | Ownership

2) Equity is ownership, not an IOU. Debt promises interest and repayment; equity gets paid last but can grow without limit if the business thrives. That is why shares can rise many‑fold over years while bonds pay steady, capped returns.

3) Dividends are optional cash returns from profits. Mature firms often pay a steady amount; faster‑growing firms usually reinvest to expand. Reinvested dividends (DRIP) quietly compound your holdings over time.

4) Prices move when expectations change. Good news pulls in buyers, bad news pushes in sellers, and liquidity decides how far prices jump. In the short run emotion dominates; in the long run earnings matter most.

5) Stock exchanges are digital marketplaces that match buyers and sellers in milliseconds. They ensure fair rules, publish prices, and handle settlement so ownership actually changes hands after trades.

Related: Stock Exchange | NYSE | NASDAQ

6) Market capitalisation is share price times number of shares — a quick way to size a company. Categories (small, mid, large, mega) hint at risk and behaviour: small caps can swing big; mega caps move slower but steadier.

7) Blue chips are reliable giants with durable profits and strong balance sheets. They anchor portfolios, often pay dividends, and survive recessions better than most.

8) Growth stocks prioritise expansion over current profits: big sales growth, new markets, heavy reinvestment. Investors accept higher volatility for the chance of outsized long‑term gains.

9) Value stocks look cheap versus their earnings, assets, or peers. The bet is mispricing: sentiment is worse than reality, and patience will be rewarded when prices and fundamentals reconnect.

10) Volatility is how much prices wiggle. Fast‑moving shares can offer opportunity but also stress and bigger drawdowns; steadier shares are calmer but slower. Match volatility to your time horizon and sleep level.

Related: Volatility | Beta | Risk Management

11) A stock index is a representative basket (e.g., S&P 500) used to track the market. It is the default benchmark most funds compare against and the simplest way to invest broadly.

Related: Stock Index | S&P 500 | Dow Jones

12) Bull markets rise on optimism; bear markets fall on fear. Cycles alternate, but the long‑term trend has historically been upward as productivity and populations grow.

Related: Market Trend | Bull Market | Bear Market

13) IPO (Initial Public Offering) is when a private company sells stock to the public for the first time. It's a big milestone, raising huge capital but also putting the firm under public scrutiny. Facebook's IPO in 2012 raised $16 billion, one of the largest in history.

Related: IPO | Going Public | Primary Market

14) Liquidity in stocks means how easy it is to buy or sell without moving the price. Apple shares are highly liquid — millions trade daily. Small, obscure companies may be illiquid, with few buyers or sellers, making trades harder.

15) Brokers are the middlemen that connect investors to exchanges. In the past, you needed a phone call to place an order; today, apps like Robinhood or eToro let anyone trade instantly. Brokers charge commissions, though some now advertise "free trading" while making money elsewhere.

16) Order types exist because investors want control. A market order buys immediately at current price. A limit order buys only if price falls to your chosen level. A stop order triggers a buy or sell if price passes a threshold. Orders shape how trades play out.

Related: Order Types | Market Order | Limit Order

17) Short selling is betting a stock will fall. You borrow shares, sell them at today's price, then aim to buy back cheaper later and return them, pocketing the difference. If the price rises instead, losses can be unlimited. The 2021 GameStop saga showed short sellers being squeezed by retail traders.

18) Derivatives are contracts linked to stocks but not the stocks themselves. Options and futures are the most common. They allow betting on price moves, hedging risk, or leveraging gains. Derivatives are powerful tools — and dangerous in careless hands.

Related: Derivatives | Options | Futures

19) Valuation is the attempt to figure out what a company is really worth. Investors look at earnings, growth, assets, debts, and compare with competitors. If market price is lower than estimated worth, the stock is attractive. Valuation is part science, part art, since the future is always uncertain.

20) The P/E ratio (Price-to-Earnings) is a simple valuation measure. It divides stock price by earnings per share. A high P/E means investors expect future growth; a low P/E may signal a bargain or trouble. Apple trades at ~30 P/E today; a traditional utility may be closer to 10.

21) Dividends yield is annual dividends divided by stock price, shown as a percentage. A $100 stock paying $5 yearly has a 5% yield. High yields can attract investors, but sometimes they signal a struggling firm clinging to investors with payouts.

22) Earnings reports are released quarterly, showing profit, revenue, debt, and guidance. They can make stocks soar or crash overnight. If a company beats expectations, shares jump; if it misses, shares fall, even if profits are good. Markets trade on surprise, not just results.

23) Buybacks happen when companies repurchase their own shares, reducing supply. This boosts earnings per share and often raises stock price. Apple has spent hundreds of billions on buybacks, returning value to shareholders without paying dividends.

24) Institutional investors are big players like pension funds, hedge funds, or mutual funds. They control trillions and can move markets with trades. Their strategies often differ from retail investors — more data, more patience, more influence.

25) Retail investors are individual traders like you and me. Technology and apps gave them easier access, sparking movements like "meme stocks." GameStop and AMC soared in 2021 because retail traders coordinated online, briefly overpowering institutions.

26) Insider trading is buying or selling based on non-public information. It is illegal in most countries. If a CEO sells shares just before bad news is released, that's insider trading. Regulators fight it to keep markets fair, though it still happens.

27) Index funds are investments that track an index like the S&P 500. Instead of picking individual stocks, you own the whole basket. Warren Buffett has long recommended index funds for ordinary investors — low-cost, diversified, reliable.

28) ETFs (Exchange Traded Funds) are similar to index funds but trade like stocks. You can buy or sell them all day, unlike mutual funds which settle once daily. ETFs now cover everything — from broad markets to specific themes like "clean energy" or "semiconductors."

Related: ETF | Sector ETFs | Thematic ETFs

29) Volatility indexes measure fear in markets. The most famous is the VIX, based on options prices for the S&P 500. A high VIX means investors expect turbulence. Traders call it the "fear gauge" — it often spikes during crises.

Related: VIX | Volatility Smile | Fear Index

30) Recessions hit stocks because company profits shrink. In downturns, consumers spend less, businesses cut costs, and investors panic. Defensive stocks (healthcare, utilities) tend to hold up better than cyclical ones (travel, luxury).

31) Bull runs can last years, where optimism feeds rising prices. The 2010s saw one of the longest bull markets in history, fuelled by low interest rates and tech growth. Such periods make fortunes, but also breed bubbles.

Related: Bull Run | Market Cycle | Market Bubble

32) Bubbles form when prices rise far above actual value, driven by hype. Tulip Mania in the 1600s, dot-com stocks in the 1990s, or meme stocks in 2021 show the same pattern: frenzy, rapid rise, then collapse. Stocks carry human psychology as much as numbers.

33) Divisions of markets help investors. Large-cap (big companies), mid-cap, and small-cap stocks offer different risk/reward balances. Small caps can double quickly or collapse just as fast; large caps move slower but steadier.

34) Day trading is buying and selling within a single day to capture small moves. It requires speed, focus, and tolerance for risk. Few succeed long-term, but the idea of quick profits draws many. The majority of wealth in stocks is still built over decades, not days.

35) Long-term investing uses time as a weapon. Over decades, the stock market has always risen despite crashes. Compounding dividends and growth reward patient investors. Buffett calls it "the transfer of money from the impatient to the patient."

36) Sector investing focuses on industries. Tech, healthcare, energy, finance, consumer goods — each moves differently in cycles. Investors diversify across sectors to balance growth with safety.

37) International investing spreads risk beyond one country. Emerging markets like India or Brazil carry high growth potential but higher risk. Developed markets like the US or Europe are steadier. Global investing recognises that opportunity isn't confined to one nation.

38) ESG investing (Environmental, Social, Governance) grew because investors care not just about profit but about impact. Companies with sustainable practices attract these funds. Critics argue some firms "greenwash" to appear better than they are.

39) Market psychology is as powerful as fundamentals. Fear, greed, and herd behaviour often drive prices. Crashes happen when panic spreads; bubbles when greed dominates. Studying charts is partly studying human emotion in numbers.

40) Stocks are culture as well as finance. They shape retirement funds, household wealth, politics, and even memes. WallStreetBets, Warren Buffett quotes, Tesla bulls vs. bears — all show that stocks are more than numbers. They are the theatre of human belief in the future.

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