Stock Market Basics

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Floor brokers trade stocks on behalf of their clients on the floor of major stock exchanges.
Floor brokers trade stocks on behalf of their clients on the floor of major stock exchanges. (Image: Jupiterimages/Goodshoot/Getty Images)

The stock market is a catchall phrase that refers to the buying and selling of investment securities. These investments can include stocks, bonds, options, futures, mutual funds, exchange traded funds, commodities and limited partnerships. Many of these securities are traded on stock exchanges, but others are traded over the counter through investments brokerage firms. Much of the business conducted in the stock market comes from institutional investors, but new technologies such as online trading have made the stock market much more accessible to individual investors.

Brokerage Accounts

Individual investors must typically have an investment brokerage account in order to buy and sell securities. Brokerage accounts come in two primary types: cash accounts and margin accounts. Investors who have cash accounts are required to pay for their investment purchases in full within the time prescribed by law. Investors who have margin accounts can borrow money against securities in their portfolio to pay for additional securities or for any other purpose. Any loans made in the margin account will accrue interest until the loan is repaid.

Investments

You can buy several kinds of investments, but they all fall into one of two primary categories: equities or debt instruments. Equity investments represent ownership in the underlying security. Corporate stock is an example of an equity investment. Debt instruments represent a debt obligation of the issuing organization. The issuing organization agrees to pay a stated rate of interest at periodic intervals in addition to returning the face value of the bond upon maturity. Corporate bonds are an example of a debt instrument.

Orders

An investor can place buy orders and sell orders with a broker, but a wide variety of differences exist within those orders. An investor can place an order to buy at the market, which will execute at whatever price the stock market dictates. A buy limit order places an upper limit on the amount the investor is willing to pay for the security. A stop-loss sell order dictates a price, usually below the current market price for the security, which will trigger a sell order. Investors use a stop-loss order to protect gains in a security or to limit a loss.

Considerations

Investors must be aware that all investments in the stock market involve risk. Some investments involve more risk than others. Investments in the stock market are not insured by the Federal Deposit Insurance Corporation or any other federal agency. Past performance by any security or investment is never a guarantee of future results. Investors can lose some or all of their investment.

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