Who the Hell is NASDAQ?
A Guide to Investing for Beginners
If you’ve picked up a newspaper or turned on the TV during these turbulent times, you’ve undoubtedly heard people freaking out about the stock market. However, you’re not sure why. This is the case for many of us in our early 20’s. The majority of articles regarding investing and millennials discuss the lack of enthusiasm for investing and the lack of knowledge about what investing actually is, so let’s clear things up by answering some common questions about the stock market and how it works. This is far from an exhaustive list of answers about the stock market, but if you’ve been considering investing some of your hard-earned income, hopefully this will give you some insight on what’s involved. Let’s cut through this jargon.
What is the Stock Market?
The stock market is a broad collection of exchanges (like the New York Stock Exchange or NASDAQ) where investors can buy or sell shares of a company that decides to “go public”. This means that regular people (like you and me) can buy shares and own that portion of a publicly held company.
Why Do Companies Go Public?
Companies go public when they want to raise a large sum of money to accomplish a new company objective. This could be to gather funds for a new venture, to expand production of a current product, or even to open up new locations to sell more product. In exchange for this large influx of cash, companies will sell ownership shares of their company. Going public and listing shares on an exchange to sell shares to the general public for the first time is known as an Initial Public Offering (IPO). After the IPO, which is considered a primary market, shareholders can continue buying or selling shares on an exchange in what is known as the secondary market. When you buy stock the secondary market is where those trades occur.
Why Does the Stock Price for a Company Go Up and Down?
The price of a company’s stock price can go up or down for a variety of reasons, but let’s simplify it. In the simplest sense, the price of a stock moves because of supply and demand. If there are more investors that want to buy a stock than sell it that means the demand is higher which leads to higher stock prices. On the other hand, if more investors want to sell a stock than buy, supply would be greater than demand, and the price would decrease.
For example, if a Company A unexpectedly announces that it will be able to produce double the amount of cars than previously anticipated, demand to buy the company’s share will increase because investors deem this to be positive news for the future of the company. This will increase the price of the Company A’s stock. Conversely, if Company A announces that production will be halved due to a fire in their factory, there will be very little demand to buy the stock and a very large amount of investors trying to sell the stock. This will decrease the price of the stock.
How are Stocks Bought?
Let’s take it step by step. Let’s say you searched online and found the most suitable brokerage for you. A brokerage is an intermediary between an investor (you) and an exchange (NASDAQ, New York Stock Exchange). These brokerages (Robinhood, E*TRADE, Charles Schwab, etc.) are members of the exchange and will fill your order of buying or selling stock. On any given trading day there are tens of millions of trades occurring across the globe across several exchanges. To understand the execution of a single trade, we need to simplify some of the jargon. Let’ start with the bid, ask, and current price.
The bid price is the highest amount an investor is willing to pay for a share of stock and the ask price is the lowest price that an investor is willing to accept. The current price is simply the most recent price that a stock has sold for. The majority of the time, the bid and the ask price are very close to what the current stock price is. The difference between the bid price and the stock price is called the bid-ask spread. Generally, the smaller the spread the better. This is because a smaller bid-ask spread indicates that there is more liquidity (greater amount of buyers and sellers) for that specific stock which means that your order will be filled quickly.
Now that we understand those terms we can understand how a broker fills your order. The broker is obligated to fill your order at the best possible price which will be somewhere between the bid and the ask price, and not always exactly the price the stock was at when you pressed the “purchase shares” button. There are ways to fill an order at an exact price, but that’s a blog post for a different day :)
Where Should I Start?
By now, you’re probably thinking, “Wow, Nishant. You’re so smart and so thorough! You’ve absolutely convinced me, I’m ready to explore the world of investing. Where do I get started?” Well, with all your newfound knowledge safely stored in that big brain of yours, it’s time to do your research and choose the best brokerage firm for you. You’ll need some personal identification, including your social security number. Here’s a preliminary list to get you started, but don’t end your research here! There’s still lots to learn about investing and developing the investing mindset.
There are many brokerage firms to choose from, but don’t feel overwhelmed by the choices before you! At the end of the day, all these firms offer many of the same services with some having more features that you may find useful, and some will have features that are way beyond you, and that’s okay. Do your research and find the brokerage that you feel best fits your needs. Remember, this is just one of the many steps on a long but worthwhile journey to the world of personal finance.
This is a story from Runway Finance, a blog that explains financial concepts from a practical, approachable, and helpful lens. Thanks for reading!
