How the Stock Market Works

Stock futures are derivative contracts that track the future price of a certain stock. They are agreements to buy or sell a specific stock at a predetermined price on a set date in the future.

The Futures Market is where individuals and institutions buy and sell contracts to deliver a commodity, currency, or security at an agreed-upon time. These contracts are standardized for quality, quantity, delivery dates, and settlement terms.

A hedge fund is an investment vehicle that pools capital from high-net-worth investors and flexibly invests in a range of assets, including stocks, bonds, commodities, and derivatives.

Most stocks are considered liquid assets because they are traded on open exchanges. But not all stocks are liquid. Penny stocks trading on over-the-counter (OTC) exchanges can have few buyers and sellers, making them illiquid, high-risk investments.

When a stock is delisted, the company's shares will no longer be available for trading on the stock exchange. Delisting can occur because of illiquidity, mergers, takeover, or bankruptcy. Delisting can impact the money shareholders have invested.

A stock market rally is a sudden and sustained growth in equity prices. Rallies are triggered by increased investor confidence, reduced risk, and frenzied buying activity. A rally can be cyclical, sector or broad market, and short, medium, or long-term.

We explain the 101 most important stock market terms and decipher financial jargon with simple definitions and practical examples.

The market is an auction where traders and investors trade company stocks through bids and offers. The spread, the difference between these prices, represents the exchange's profit. Brokers profit from commissions, while investors benefit from stock price growth and dividends.

To remember the direction of bull and bear markets, associate each with the animal it represents. A bull market moves with the upward trajectory of its horns, while a bear market moves with a bear's claws swiping downward. 

Interest rates significantly impact the stock market. Low rates mean cheap money for businesses and consumers, boosting demand for goods and services. This drives up companies' profits and stock prices. Conversely, with rising rates, borrowing becomes costlier, reducing spending and causing stock prices to fall.

Mainstream finance websites regurgitate mindless tips for beginner investors written by interns. Our advice provides proven research based on decades of analysis, from charts, patterns, and indicators to tested investing growth, dividend, and value investing strategies.

Understanding stock market basics is a crucial first step for beginners. Understanding exchanges, indexes, buy-and-hold, and diversification is a good start. Risks, rewards, and goals are key to a solid foundation. Finally, charts, patterns, and indicators are the investor's toolbox.

Stock analyst ratings provide investors with guidance about the future growth and profitability of a company. Unfortunately, our data shows that analyst ratings are 95% inaccurate and are heavily "Buy" or "Strong Buy" biased.

Common stock has voting rights and price appreciation in line with market prices, whereas preferred stock does not. However, preferred stock has higher priority dividend payments and liquidity rights in case of insolvency. The downside of preferred stock is that it has no voting rights, and they are callable.

In a stock split, a company divides its existing shares into multiple shares to increase liquidity. A reverse stock split combines several shares into one to reduce outstanding shares.

Real Estate Investment Trusts (REITs) are publicly-traded entities that own or finance income-generating real estate assets. By investing in REITs, individuals can participate in the real estate market without directly purchasing physical properties.

Our live fear and greed index charts enable you to see the sentiment of investors, the turning points between bull and bear stock markets, and know when to buy and sell stocks.

The best ways to learn stock trading are with books, audiobooks, trading communities, or free and professional investing courses offered by industry-certified instructors. Make sure to avoid anyone pedaling get-rich-quick schemes offering more than 25% gains in a year.

Commodities are tangible goods such as food, metals, and energy that traders can buy or sell in the financial markets. These commodities are traded on global exchanges, and their prices fluctuate based on supply and demand.

Checking a broker's or financial advisor's background before investing should not be overlooked. Performing checks with FINRA, IAPD, and the CFP board can help ensure your investments are safe and that you're working with someone trustworthy.