Academy · Stage 1
The stock market
How stock markets began, how they work today, and what you need to know before trading shares or indices.
What a stock is
A share is a piece of ownership in a company. Owners are entitled to a share of profits, usually paid as dividends, and to a vote at shareholder meetings. Shares trade on exchanges, and their prices reflect what buyers and sellers think the business is worth today and will be worth tomorrow.
A short history
Amsterdam, 1602. The Dutch East India Company issued the first shares that could be freely bought and sold, and the Amsterdam exchange became the first modern stock market. Short selling, options and futures all appeared there within decades.
London and New York, 1700s. The London Stock Exchange grew out of coffee-house trading. In 1792, 24 brokers signed the Buttonwood Agreement under a tree on Wall Street, creating what became the New York Stock Exchange.
Industrial expansion, 1800s. Railways, steel and banks raised capital through shares. Stock tickers began transmitting prices by telegraph in 1867, the first real-time market data.
1929 and after. The crash of October 1929 wiped out a large part of US market value and led to the Great Depression. The response created the Securities and Exchange Commission in 1934 and the disclosure rules that still govern listed companies.
Nasdaq, 1971. The first electronic exchange. It became the home of technology companies and eventually of most trading volume.
Black Monday, 1987. The Dow Jones fell 22.6 percent in a single day, largely driven by automated selling. Exchanges introduced circuit breakers that pause trading during extreme moves.
Decimalisation and electronic trading, 2000s. US markets moved from fractions to cents in 2001, narrowing spreads. Electronic and high-frequency trading came to dominate volume.
2008 and 2020. The financial crisis and the pandemic both produced historic drawdowns followed by sharp recoveries, and both were met with unprecedented central bank support. They are the reason equity traders now watch monetary policy as closely as earnings.
Zero-commission and retail growth, 2019 onward. Commission-free trading and mobile apps brought millions of new participants into the market, along with fractional shares and options trading at retail scale.
How trading works today
Exchanges match buyers and sellers. Major ones include the NYSE and Nasdaq in the US, the London Stock Exchange, Euronext, the Tokyo Stock Exchange and the Shanghai and Hong Kong exchanges.
Trading hours are fixed. US cash markets run 09:30 to 16:00 New York time, with thinner pre-market and after-hours sessions.
Order types. A market order fills immediately at the best available price. A limit order fills only at your price or better. Stop orders trigger when a price is reached. Most trading mistakes by beginners involve using the wrong one.
Indices such as the S&P 500, Nasdaq 100, FTSE 100 and DAX track baskets of shares. Traders access them through futures, ETFs or CFDs.
Market capitalisation is share price times shares outstanding. It is what “size” means when people talk about large-cap and small-cap stocks.
What moves stocks
1
Earnings. Quarterly results and guidance move individual shares more than anything else.
2
Interest rates. Higher rates make future profits worth less today and make bonds a more attractive alternative. Growth stocks are most sensitive.
3
Economic data. Growth and inflation figures move the whole market through their effect on rate expectations.
4
Sector rotation. Money moves between sectors as the economic outlook shifts, which is why a stock can fall on a day its company reported nothing.
5
Sentiment and positioning. Crowded trades unwind quickly.
Ways to trade equities
Cash shares — you own the stock. Suitable for investing and for swing trading without leverage.
ETFs — funds that trade like shares and track an index, sector or theme.
Options — contracts giving the right to buy or sell at a set price. Powerful, complex, and easy to lose money with.
Futures — standardised contracts on indices, traded on exchanges. Institutional and professional territory.
CFDs — see the next page.
RISK DISCLAIMER
Praevis publishes education and market commentary. Nothing here is investment advice. Trading forex, stocks and CFDs carries a high level of risk and may not be suitable for all investors.