Stocks and ETFs

Everything in this course so far applies to every market. From here on, each asset class has its own personality: what you actually own, when it trades, how much leverage is built in, and who is on the other side. We start with the most familiar: stocks, and the funds that bundle them.

What a stock actually is

A share of stock is a slice of ownership in a company. If a company has 100 million shares and you own 100, you own one-millionth of it. That entitles you to:

• A share of profits if the company chooses to pay dividends.
• A vote on a few big decisions (most retail holders never use it).
• A claim on what is left if the company is sold or liquidated, after every lender has been paid.

The price of the share is what the market thinks that slice is worth today, which is a mix of what the company earns now, what people expect it to earn later, what interest rates are, and how the crowd feels. Over years, earnings dominate. Over days, feelings dominate. This is why the same stock can be a sensible long-term holding and a coin flip for a day trader.

Market capitalization ("market cap") is share price times shares outstanding: the market's price for the whole company. It is a better measure of size than share price. A $500 stock with 10 million shares is a $5B company; a $5 stock with 10 billion shares is a $50B company. Never judge a stock by its per-share price.

Where and when stocks trade

In the US, regular hours are 9:30 am to 4:00 pm Eastern, Monday to Friday, excluding exchange holidays. Pre-market (roughly 4:00 to 9:30 am) and after-hours (4:00 to 8:00 pm) sessions exist with thin liquidity.

Other countries have their own hours and rules: London 8:00 to 16:30 local, Tokyo has a lunch break, some markets have daily price limits that halt trading after a set move. If you trade a foreign stock, learn its session before you learn its chart.

Settlement. When you sell a US stock, the cash becomes fully yours one business day later (T+1, since 2024). Most brokers let you reuse the money immediately in a margin account, but in a cash account this creates a rule you will meet in Module 5.

Leverage in stocks

Stocks are not leveraged by design. One share is one share. Leverage comes from your account:

• A cash account lets you buy with the money you have. Maximum leverage: 1x.
• A margin account in the US lets you borrow up to 50% of a position's value overnight (Regulation T) and, for day trades, up to 4x intraday if you qualify as a pattern day trader. Details in Module 5.

Compare that to the 10x, 20x or 100x built into futures, forex and crypto derivatives, and stocks are the least leveraged thing you can trade. That is a feature for a beginner.

Who trades stocks

Everyone, which makes large-cap stocks the deepest and most orderly retail market on earth. Institutions dominate large caps; retail and small funds dominate small caps. Market makers are on the other side of most retail orders.

ETFs: a basket you can trade like a stock

An exchange-traded fund is a fund that holds a basket of things (stocks, bonds, commodities, sometimes derivatives) and whose shares trade on an exchange all day exactly like a stock. Buy one share of a broad index ETF and you own a tiny slice of hundreds of companies.

Why ETFs matter to a trader:

Index ETFs (tracking the S&P 500, the Nasdaq-100, etc.) are among the most liquid securities in the world and are what most beginners should use to learn order mechanics: penny spreads, enormous size, no earnings surprises.

The ETFs that hurt beginners

Not all ETFs are boring baskets. Three kinds need warnings:

Leveraged ETFs promise 2x or 3x the daily move of an index. Because they reset every day, over weeks they drift away from 2x or 3x the index's total move, and in choppy markets they lose value even if the index ends up flat. They are day-trading tools that get held by people who did not read the prospectus.

Inverse ETFs go up when the index goes down. Same daily-reset problem, plus the built-in headwind that markets rise over time.

Commodity and volatility ETFs/ETNs often hold futures contracts rather than the thing itself. They pay a constant cost to roll from one contract to the next, and some have lost most of their value over years while the commodity they "track" went nowhere. None of these are scams; they are tools whose job is not "buy and forget".

Key idea: A stock is a slice of a business; an ETF is a slice of a basket. Both trade with the same mechanics you learned in Modules 2 and 3, and plain index ETFs are the cleanest place to practice those mechanics. Leveraged, inverse and futures-based ETFs are different animals with a daily reset that punishes holding.

Two things that only stocks have

Earnings. Four times a year every US public company reports results, usually before the open or after the close. The stock can gap 5, 10, 20% either way. It is the single largest scheduled risk in stock trading, and every beginner should know the earnings date of anything they hold overnight.

Corporate actions. Splits, dividends, spin-offs, buybacks, rights issues. Most are mechanical and your broker handles them, but a dividend can drop the price by the dividend amount on the ex-date and confuse someone who did not know it was coming.

Try it: Pick one large company you know. Find its market cap, its average daily volume, its next earnings date, and whether it pays a dividend. Then find the biggest ETF that holds it and see what percentage of the fund it makes up. You now know more about that stock's structure than most people who trade it.

Recap

• A share is a slice of ownership; the price reflects earnings over years and mood over days.
• Judge size by market cap, not share price.
• Stocks are the least leveraged asset class; leverage comes only from a margin account.
• ETFs are baskets that trade like stocks; plain index ETFs are ideal for learning order mechanics.
• Leveraged, inverse and futures-based ETFs reset daily and are not for holding; earnings dates are the biggest scheduled risk in single stocks.