Beginner6 min readLast updated: 2026-06-10
Stock Market Basics — Complete Guide
Learn how the stock market works, how to trade stocks, understand market orders, stock exchanges, fundamental analysis, and build a solid foundation for stock trading.
What is the Stock Market?
The stock market is a collection of exchanges where shares of publicly traded companies are bought and sold. When you buy a stock, you're purchasing a small piece of ownership (equity) in that company.
Key Concept
The stock market serves two purposes: companies raise capital by selling shares to the public (IPO), and investors/traders buy and sell those shares to profit from price changes or earn dividends.
How the Stock Market Works
Market Structure:
| Component | Role |
|---|---|
| Stock Exchange | Venue where stocks are listed and traded (NYSE, NASDAQ) |
| Brokers | Intermediaries connecting buyers and sellers |
| Market Makers | Provide liquidity by always offering buy/sell prices |
| Regulators | Oversee fair trading (SEC in US, FCA in UK) |
| Clearing Houses | Settle transactions, ensure delivery |
Major Stock Exchanges:
| Exchange | Location | Notable Stocks | Market Cap |
|---|---|---|---|
| NYSE | New York | Berkshire, JPMorgan, Walmart | $25+ trillion |
| NASDAQ | New York | Apple, Microsoft, Google, Tesla | $22+ trillion |
| LSE | London | Shell, HSBC, Unilever | $3+ trillion |
| TSE | Tokyo | Toyota, Sony, Nintendo | $5+ trillion |
| SSE | Shanghai | Chinese blue-chips | $6+ trillion |
Trading Hours:
- NYSE/NASDAQ: 9:30 AM - 4:00 PM ET (Regular), 4:00-8:00 PM (After-hours)
- LSE: 8:00 AM - 4:30 PM GMT
- TSE: 9:00 AM - 3:00 PM JST
- Pre-market: Limited liquidity, wider spreads
Types of Stocks
By Market Capitalization:
| Category | Market Cap | Characteristics | Examples |
|---|---|---|---|
| Large-cap | $10B+ | Stable, lower growth, dividends | Apple, Microsoft |
| Mid-cap | $2B-10B | Growth + stability balance | Zoom, Etsy |
| Small-cap | $300M-2B | Higher growth, higher risk | Emerging companies |
| Micro-cap | Under $300M | Very volatile, speculative | Penny stocks |
By Investment Style:
| Type | Focus | Best For |
|---|---|---|
| Growth Stocks | Revenue/earnings growth | Capital appreciation |
| Value Stocks | Undervalued by market | Long-term investors |
| Dividend Stocks | Regular income payments | Passive income |
| Blue-chip Stocks | Established, reliable companies | Conservative investors |
| Penny Stocks | Under $5/share, highly speculative | High-risk traders |
Fundamental Analysis for Stocks
Key Metrics:
| Metric | Formula | What It Tells You |
|---|---|---|
| P/E Ratio | Price ÷ Earnings Per Share | How expensive relative to earnings |
| EPS | Net Income ÷ Outstanding Shares | Profitability per share |
| P/B Ratio | Price ÷ Book Value | Price vs. actual asset value |
| Dividend Yield | Annual Dividend ÷ Stock Price | Income return percentage |
| Revenue Growth | (Current - Previous) ÷ Previous | Company growth rate |
| Debt/Equity | Total Debt ÷ Shareholder Equity | Financial leverage/risk |
| Free Cash Flow | Operating Cash - Capital Expenditures | Available cash |
Earnings Reports:
- Released quarterly (every 3 months)
- Contain revenue, earnings, guidance
- Major catalyst for price movement
- "Beat" expectations → stock usually rises
- "Miss" expectations → stock usually falls
How to Trade Stocks
Step 1: Choose Your Approach
| Approach | Timeframe | Analysis | Goal |
|---|---|---|---|
| Day Trading | Intraday | Technical | Daily income |
| Swing Trading | Days-weeks | Technical + Fundamental | Medium-term gains |
| Position Trading | Months | Fundamental | Trend riding |
| Investing | Years | Fundamental | Long-term wealth |
Step 2: Select a Broker
Look for:
- Low commissions (many now offer $0 commission)
- Good execution speed
- Research tools and screeners
- Fractional shares (buy partial shares)
- Regulatory compliance (SIPC insurance)
Step 3: Research & Screen
Use stock screeners to filter by:
- Market cap, sector, industry
- P/E ratio, revenue growth
- Volume, volatility
- Technical patterns and setups
Step 4: Execute Trades
- Market Order: Buy/sell immediately at current price
- Limit Order: Set your desired entry/exit price
- Stop Order: Trigger when price reaches level
- Trailing Stop: Moves with price to lock profits
Stock Trading Strategies
Momentum Trading:
- Trade stocks showing strong directional movement
- Volume confirmation essential
- Enter on breakouts or pullbacks to moving averages
- Exit on momentum exhaustion signals
Breakout Trading:
- Identify consolidation patterns (triangles, rectangles)
- Enter when price breaks through with volume
- Stop loss below breakout level
- Target measured move distance
Gap Trading:
- Trade price gaps at market open
- Gap up + continuation = ride the trend
- Gap up + reversal = fade the gap
- Pre-market analysis crucial
Key Stock Market Concepts
Dividends:
- Cash payments to shareholders (quarterly/annually)
- Dividend Yield = Annual Dividend ÷ Share Price
- Ex-dividend date: buy before to receive payment
- Dividend reinvestment compounds returns
Stock Splits:
- Company divides shares (2:1 split: double shares, half price)
- No change in total value
- Increases accessibility for retail traders
- Often bullish signal
Market Orders & Bid-Ask:
- Stocks have bid-ask spread (usually $0.01 for liquid stocks)
- Market orders execute immediately at best available price
- Limit orders give better control over entry
Risks & Considerations
| Risk | Description | Mitigation |
|---|---|---|
| Market Risk | Overall market decline | Diversification, stops |
| Company Risk | Specific company issues | Research, position limits |
| Liquidity Risk | Can't exit at desired price | Trade liquid stocks |
| Gap Risk | Overnight price jumps | Position sizing, hedge |
| Regulatory Risk | Rule changes, delistings | Stay informed |
US Stock Market Rules
Pattern Day Trading (PDT) Rule:
- Applies to US margin accounts
- 4+ day trades in 5 business days = PDT
- Requires $25,000 minimum equity
- Cash accounts exempt (but limited by settlement)
Settlement:
- T+1 settlement (trade date + 1 business day)
- Cash accounts must wait for settlement
- Margin accounts can trade immediately
Related Topics
- What is Trading? — Trading fundamentals
- Investing vs Trading — Choose your approach
- Technical Indicators — Chart analysis tools
- Order Types — Execution methods
- Indices Trading — Trade market baskets