Understanding the Stock Market: Structure, Shares, and Risks

In the previous lessons, we became familiar with the concept of financial markets, and then we explored the Forex and crypto markets in greater detail. Now, we want to move on to another one of the world's most important financial markets: the stock market. In this lesson, we're not going to start learning fundamental analysis, technical analysis, stock selection, or trading strategy design yet. The goal is to first understand the stock market itself properly, and know exactly what is traded in this market, and how buying and selling stocks works.

In this video, we want to know: what is the stock market? What exactly does buying a share mean? Why do companies issue their shares? What is the difference between the primary market and the secondary market? What roles do the stock exchange and the broker play? How are buy and sell orders executed? What types of stocks and what types of orders do we have? Where does a shareholder's return come from? And what risks are involved in participating in the stock market? To make these topics more tangible, we'll look at most of our examples through the US stock market, especially the New York Stock Exchange, and the UK stock market, especially the London Stock Exchange.

What is the stock market? The stock market is a part of the financial market where ownership in companies is issued, bought, sold, and valued in units called shares. To understand this definition better, you first need to know exactly what a share is. Imagine that a company is established, and its ownership is divided into one million equal parts. Each of these parts is called a share. If you buy 10,000 shares of this company, you will own 1% of it. In other words, the number of shares you own, divided by the company's total issued shares, determines your percentage of ownership. So, when you buy shares in a company, you haven't just bought a number or a price chart. You have bought part of the ownership of a real business. This is why stocks are also called equity, meaning ownership rights.

Of course, buying a share doesn't mean that you directly own a particular desk, building, car, or piece of equipment belonging to the company. All of these assets belong to the company as a legal entity. By buying shares, you become an owner of part of the company's equity, and depending on the type of shares you own, you may have rights such as receiving dividends or taking part in shareholder voting.

The terms stock and share are often used interchangeably, but there is a small difference between them. Stock refers more to the general concept of stock ownership, but a share is a specific unit of ownership in a company. For example, when you say that you invest in the stock market, you are talking about the general concept of stock. But when you say that you own 100 shares of a company, you are talking about 100 specific units, meaning 100 shares. You should also distinguish between three concepts: the company, the share, and the ticker symbol. The company is the business that carries out economic activity. A share is one unit of ownership in that company. And the ticker symbol is the short identifier through which a stock is displayed in the market. So, we buy a company through its shares, and we identify those shares on a trading platform through their specific ticker symbol.

Why should a company sell part of its ownership to others? Every company needs capital in order to grow and expand. For example, a company may want to launch a new production line, create new products, enter other countries, build a factory, purchase equipment, hire employees, or reduce its debt. A company has different ways of raising this capital. It can use its previous profits. It can borrow money from a bank. It can issue debt securities. It can attract private investors. Or it can issue part of its ownership in the form of shares.

When a company takes out a loan, it must repay the principal and interest according to the agreement. But when it issues shares, it usually doesn't create an obligation to repay the principal amount on a specific date. Instead, new investors join the company's group of owners. So, the stock market connects two groups: companies that need capital to grow and expand, and investors who want to participate in the ownership and financial results of those companies. For example, if you are interested in the future of the pharmaceutical industry, you don't need to build a pharmaceutical factory from scratch, obtain licenses, and hire employees yourself. You can buy shares in a publicly traded pharmaceutical company, and participate in the ownership and financial results of that company in proportion to your investment.

To understand how the stock market works more clearly, you need to know the difference between the primary market and the secondary market. The primary market is where new shares are issued and sold to investors for the first time. One of the best known examples of the primary market is an initial public offering, or IPO. IPO is the shortened form of initial public offering, and it refers to the first public offering of a company's shares. Imagine that a private company decides to offer part of its shares to the public for the first time and list on the New York Stock Exchange. The company must prepare and disclose its financial, legal, and operational information, as well as its risks. It must complete the legal and exchange listing procedures, and then the price and terms of the offering are determined. Investors buy the offered shares, and after admission, the company's shares enter the public market for trading. The money raised from selling new shares in the primary market, after costs are deducted, and depending on the structure of the offering, can go to the company, and be used for purposes such as business expansion.

But after the initial offering, the shares enter the secondary market. The secondary market is the market we usually see on trading platforms, where shareholders sell their shares to other investors. There is one very important point here: when you buy a stock in the daily trading of an exchange, your money usually does not go directly into that company's account. You buy the shares from another shareholder or seller, and the money goes to the seller of the shares. So, in the primary market, new shares are issued and the company can raise capital. But in the secondary market, shares that have already been issued are transferred between investors. The existence of this secondary market allows investors to sell their ownership to others and exit their investment when needed.

Now, let's move on to stock exchanges. A stock exchange is an organized market that provides the infrastructure needed to place orders, conduct trades, publish prices, and supervise the activity of market participants. A stock exchange has rules for admitting companies, trading shares, disclosing information, and the activities of market participants.

The New York Stock Exchange, abbreviated as NYSE, is one of the most important exchanges in the United States. But the US stock market is not limited to the New York Stock Exchange. Nasdaq, NYSE American, NYSE Arca, and many other trading venues also operate in the US market. In the United Kingdom, we also have the London Stock Exchange. On the London Stock Exchange, larger and more established companies are usually listed on the main market. Alongside it, there is AIM, which is designed mainly for smaller and medium-sized growth companies. The fact that a company is listed on an exchange does not guarantee that it will be successful or profitable. Listed companies can still face declining revenue, debt, poor management, business failure, or even bankruptcy.

One of the important differences between the stock market and Forex is that the stock market is not open 24 hours a day. Each exchange has its own specific trading hours. The core trading session of the New York Stock Exchange runs from 9:30 a.m. to 4:00 p.m., New York time. On the London Stock Exchange, regular trading usually begins at 8:00 a.m. and continues until 4:30 p.m., London time. At the beginning and end of the trading day, an opening auction and a closing auction take place. In the opening auction, orders collected before the market opens are matched with each other to determine the opening price. During the main session, buying and selling take place continuously. And at the end of the day, the closing auction determines the stock's official closing price.

Now, why is it important to understand market hours? Imagine that a company releases an important financial report after the market has closed. Because the main market session is closed, the stock may open in the next session at a price significantly different from the previous day's closing price. This difference is called a price gap. So, unlike the crypto market, which is open 24 hours a day and 7 days a week, the stock market has fixed hours and the possibility of price gaps when it reopens.

In some markets, trading may also be available before or after the main session. This is called pre-market and after-hours trading. However, these periods usually have fewer participants, lower liquidity, wider spreads, and different volatility.

Now, let's see how we can enter the stock market. We usually can't enter the New York Stock Exchange or the London Stock Exchange directly and place an order ourselves. To access the stock market, we need to use a broker. You open

open an account with a stockbroker, complete identity verification, fund your account, and place buy or sell orders through that broker's platform. After reviewing the order, the broker sends it to an exchange, a market maker, or one of the available execution venues.

So, the exchange and the broker are not the same thing. The exchange is the infrastructure and marketplace where trades take place. The broker is your intermediary for accessing that market.

When choosing a stockbroker, you should consider factors such as credibility and regulation, actual ownership of the asset, accessible markets, costs, order execution quality, account security, asset custody arrangements, and the ability to transfer shares. We'll examine this topic fully in the dedicated lesson on choosing and using a stockbroker.

Buying real shares is not the same as trading stock CFDs. When you buy real shares in the spot market, you gain economic ownership of part of the company, and depending on the type of shares, you may have rights such as receiving dividends or voting rights.

But a CFD, or contract for difference, is a derivative contract between you and the provider. With a CFD, you usually do not become the owner of the actual shares. You only trade on whether their price rises or falls.

A broker may apply dividend-related adjustments to your account, but this is not the same as receiving dividends as the actual owner of the shares.

So, before every trade, you should know exactly what your broker is offering you. Is it a real share? Is it a fractional share? Is it an ADR? Is it an ETF? Or is it a stock CFD? A similar price chart does not mean these instruments have the same nature.

Now, let's move on to the main participants in the stock market. The first group is the companies themselves, which issue their shares.

The second group is retail investors like us, who participate with personal capital.

The third group is institutional investors, such as investment funds, pension funds, insurance companies, hedge funds, and asset managers.

The next group is brokers, which receive customer orders and send them for execution.

Market makers help create liquidity by continuously providing buy and sell prices.

The exchanges themselves provide the infrastructure for conducting trades.

Clearing and settlement institutions manage financial obligations and the final transfer of cash and shares.

And finally, regulatory bodies oversee the enforcement of rules and address violations such as insider trading or market manipulation. For example, in the United States, the SEC is one of the main regulators of the securities market, and in the United Kingdom, the FCA plays an important role in supervising the market.

Now that a trade has been executed, we need to become familiar with the concept of settlement.

Trade execution and trade settlement are not the same thing. The trade date, or T, is the day your buy or sell order is executed. The settlement date is the day the final transfer of cash and shares takes place according to the standard settlement cycle.

In the US market, since May 2024, the standard settlement cycle for most stock trades has been T plus one. This means that if a trade is executed on a business day, it will usually settle one business day later.

But in the United Kingdom, at the time this lesson was prepared, the general settlement cycle for most trades is T plus two, and it is planned to change to T plus one from October 2027.

Seeing the cash proceeds from a sale in your account does not always mean that final settlement has occurred or that the money is immediately available for withdrawal. Withdrawal rules depend on the settlement cycle, the type of account, and the broker's policy.

Now, let's move on to the main types of stocks. The most common type is common stock.

A common stockholder may have voting rights, receive dividends if the company approves them, and benefit from an increase in the company's value. But none of these things are guaranteed. The stock price may decline, the company may not pay dividends, and it may even go bankrupt.

In the event of bankruptcy, costs, creditors, and holders of higher priority claims are paid first. Common shareholders are usually at the end of the line and may receive nothing.

The second type is preferred stock. Preferred stock usually has priority over common stock in receiving dividends or the company's remaining assets, but it may have limited voting rights or no voting rights at all.

In the UK market, the term ordinary shares is commonly used for common stock.

Some companies also have multiple share classes, such as Class A and Class B. These classes may differ in voting power, dividends, or transferability.

So, if a company has multiple tickers or multiple share classes, you should examine the differences in their rights before buying.

Stocks can also be categorized from different perspectives. One of these categories is based on company size.

To measure company size, we usually use market capitalization, or market cap. The market capitalization formula is very simple: the price of each share multiplied by the number of shares outstanding.

For example, if a company has 100 million shares and the price of each share is $20, the company's market capitalization is $2 billion.

Based on market capitalization, companies can be categorized as large cap, mid cap, small cap, and micro cap. The numerical boundaries of these categories are not fixed globally and may differ across different sources.

There is a very important misconception here: a $5 stock is not necessarily cheaper than a $500 stock.

Imagine that the first company has 1 billion shares, and each share is priced at $5. This company has a market capitalization of $5 billion.

The second company has only 5 million shares, and each share is priced at $500. The second company has a market capitalization of $2.5 billion.

So, even though the price of each share in the second company is 100 times higher, the total value of that company is half that of the first company. So, the price of one share by itself does not determine whether that company is cheap or expensive.

Another categorization is based on business characteristics and the investor's perspective.

Growth stocks are related to companies whose revenue or earnings are expected to grow at a faster rate.

Value stocks are stocks that some investors believe are trading at a lower price relative to the company's economic value.

Income stocks are more often considered because of their regular dividend payments.

Blue-chip stocks are usually shares of large, well-known, and established companies.

Cyclical stocks are more sensitive to economic expansions and recessions.

Defensive stocks are usually associated with companies whose products or services have more stable demand across different economic conditions.

Penny stocks are very low-priced stocks that may have low liquidity, limited information, and a very high risk of manipulation.

These categories are not absolute or completely separate from one another. A company may be considered large, income-producing, and defensive at the same time.

Now, how can a shareholder earn a return?

The first source is an increase in the stock price. Imagine that you buy a stock at $50 and later sell it at $60. In this case, before costs and taxes, you have made a capital gain of $10 per share.

The second source is a dividend. A company may distribute part of its profits or resources among shareholders.

But dividend payments are not guaranteed. A company may reduce its dividend, stop paying it, or decide to keep its resources inside the business.

To calculate total return, we need to consider both the change in price and the cash dividend.

For example, imagine that you bought a stock at $100. At the end of the period, the price has reached $108, and during that period, you have also received $3 in dividends. In this case, your total return before costs and taxes is 11%: 8% comes from the price increase, and 3% comes from dividends.

But dividends are not free money. On the ex-dividend date, the stock price may adjust in proportion to the dividend amount, although other market factors can affect the price at the same time. So, buying a stock only to receive dividends, without considering the price adjustment, taxes, and market risk, does not create guaranteed profit.

Now, let's move on to stock market indices. A stock index measures the performance of a specific group of stocks based on a particular calculation method.

For example, the S&P 500 is one of the most important US market indices and measures the performance of 500 leading companies.

In the UK market, the FTSE 100 includes 100 large companies listed on the London Stock Exchange. The FTSE 250 also covers most mid-cap companies after the FTSE 100.

The important point is that an index itself is not a company or a stock. You cannot directly buy the number of the S&P 500 or the FTSE 100.

To track an index, you need to use instruments such as funds, ETFs, futures contracts, options, or CFDs.

An ETF, or exchange-traded fund, is a fund whose units are traded on an exchange like stocks. When you buy an index ETF, you own units

of that fund, not each individual stock inside the index directly in your own name.

In the stock market, it is also possible to participate with both bullish and bearish views. In a long position, you buy the stock and expect its price to rise in the future or you expect to receive other benefits such as dividends. But for trading in a bearish direction, one method is short selling. In short selling, you borrow shares that you do not own through your broker and sell them in the market. If the price falls, you buy the shares back at a lower price, return them to the lender, and the price difference can become your profit. But if the price rises, you have to buy the shares back at a higher price, and you make a loss.

The risk of a short position is greater than the risk of buying stocks normally. When you buy a stock without leverage, its price can ultimately fall to zero, and all the capital in that position can be lost. But in a short position, the stock price can theoretically rise many times over, and the loss has no fixed limit. You also need to consider share-borrowing costs, interest, margin, and the possibility of a short squeeze. For this reason, short selling is not a simple or appropriate tool for a beginner trader to start with.

The next important tool is margin or trading credit. In a cash account, you pay the full cost of buying a stock using your own money, but in a margin account, the broker lends you part of the money for the trade, and the assets in your account are used as collateral. Leverage can magnify both profits and losses.

For example, imagine that you have $10,000 in capital and borrow another $10,000 from the broker. In total, you buy $20,000 worth of stock. If the stock price falls by 10%, the value of your position declines by $2,000. This loss, compared with your initial capital of $10,000, is equal to 20% before interest and costs. If the value of your account falls below the required level, a margin call may occur, and the broker may ask you to add more money to your account or close part of your position. The broker may even sell assets to control its own risk without waiting for your further permission. So, leverage does not increase your actual capital; it only increases your level of exposure and risk.

Now, let's examine the most important risks in the stock market. The first risk is overall market risk. Because of a recession, rising interest rates, a financial crisis, war, or other events, a large part of the stock market may decline. The second risk is company-specific risk. Poor management, heavy debt, product failure, declining sales, fraud, or legal disputes can reduce a company's value. The next risk is liquidity risk. You may not be able to buy or sell the volume you want at an appropriate price. Gap risk is also very important. After important news is released, a stock may open at a significantly different price, and your stop order may execute at a less favorable price.

The next risk is company bankruptcy. In the event of bankruptcy, common shareholders are usually the last group to receive a portion of the company's remaining assets, and they may lose all of their capital. We also have risks such as share dilution, exchange-rate changes, regulatory changes, platform failure, choosing the wrong ticker symbol, using leverage, and concentrating too much capital in one stock or industry. For this reason, buying a company's shares simply because the brand is well-known, the stock price is low, or someone else recommends it is not a sound decision.

As always, before ending the lesson, let's examine a few common misconceptions. The first misconception: "When I buy a stock on an exchange, my money goes into that company's account." No. In the secondary market, you usually buy the stock from another seller, and the money goes to that seller. A company raises capital directly when it issues new shares in the primary market. The second misconception: "The New York Stock Exchange is the entire U.S. stock market." No. NYSE is one of the important exchanges in the market, but there are many other exchanges and trading venues as well. The third misconception: "Anything that has a stock price chart is a real share." No. The instrument in question may be a CFD, ETF, ADR, or another instrument. Before trading, you need to examine the exact nature of the product. The fourth misconception: "A $5 stock is cheaper than a $500 stock." No. The price of a stock, without considering the number of shares, market capitalization, revenue, debt, and the company's circumstances, does not provide enough information.

The fifth misconception: "A good company is a good stock to buy at any price." No. A company may be very high quality, but its stock price may be excessively high relative to market expectations and the company's economic value. The sixth misconception: "A reputable broker will compensate me for my market losses." No. Investor-protection schemes may provide coverage in specific circumstances involving broker failure or a shortfall in customer assets, but they do not compensate for a stock price decline or trading losses. And the final misconception: "The stock market always has high liquidity." No. Liquidity varies between different stocks, different times, and different market conditions.

If I want to summarize this entire lesson in a few points: The stock market is a market where ownership in companies is issued and traded in the form of shares. Companies can raise capital by issuing shares, and investors can participate in the ownership of companies without starting a business from scratch. In the primary market, new shares are issued. In the secondary market, previously issued shares are bought and sold between investors. To participate in the stock market, we usually use a broker, and the broker sends our order to an exchange, a market maker, or an appropriate execution venue. A stock's price is the result of interaction between buyers and sellers, and factors such as bid, ask, spread, liquidity, and order type affect the actual outcome of a trade. The price of one share by itself does not determine the value of a company, and to understand a company's size, we need to examine its market capitalization. Stock returns can come from price increases and dividends, but neither is guaranteed. Bullish trading, short selling, and margin trading are available, but the more complex and leveraged an instrument becomes, the greater the risk of participation becomes.

The stock market is not a money-making machine. It is a market for transferring ownership, capital, and risk. Technically entering this market is very easy, but participating in it properly requires market knowledge, education, practice, risk management, and commitment to a specific plan. I hope that throughout this lesson, you have developed a solid understanding of the stock market and how it works. In the supplementary lessons, we'll examine more details, such as the different stock market instruments, indices, ETFs, corporate actions, settlement infrastructure, share ownership, and how to choose and use a stockbroker. I wish you success.