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Data Driven Stock Market Insights
The Ultimate Guide
Finding sustainable trading profits means succeeding in a brutally competitive market filled with multi-billion-dollar firms who hire Ivy-League finance experts to uncover every conceivable profit opportunity.
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The US Stock Market - Overview
Taking on big institutional investors isn’t easy. But—with the right insight and tools—it can be done. The fact is, however, that most investors will never try.

That’s precisely why we’re seeing passive investing approaches come to dominate today’s market. These “buy the market” style strategies try to match the performance of the broader stock market rather than “beat” the market average. Passive investing strategies can be an important part of any portfolio. But it’s important to understand that passive, index-style investment funds inherently can’t beat the market for very long, or by very much.

With so much passive money trying to “follow the leader,” the traders who are still active and influential can create highly profitable trends — even when they’re wrong.. That’s why data-driven, trend-sensitive investing is becoming essential for retail investors who are still braving the waters to compete with big institutional investors.

But no matter your mix of trading strategies, fundamental stock market knowledge is essential for finding sustainably profitable strategies while intelligently managing risk and avoiding classic trading mistakes.

This page provides an overview of the fundamentals of the stock market. We start with a look at essential terms and concepts, proceed to look at the “sector” system used to organize different types of companies, and finish with a look at choosing a stock broker.

If you understand the basics of trading and are more curious about how NewsQuantified works to democratize data-driven stock market profits, you can read our story here.

Fundamental Terms and Concepts

A company “goes public” — offers pieces of ownership in their enterprise up for sale—to secure additional funds for (hopefully) growth. We call these “pieces” of ownership “equities” or, more typically, “shares of stock.”

The initial sale of stock to the public is called an IPO, or Initial Public Offering. After the IPO, shares of stock trade on stock market exchanges like the famous New York Stock Exchange.

You can check basic stock information on a variety of free sites like Bloomberg, Yahoo Finance, and Google Finance.

You’ll see a few stock prices listed; they’re reported as they emerge from trading in real time. The “ask” price is the amount sellers are requesting for the stock. The “bid” price is what buyers are currently offering to buy the stock for. For a “liquid” stock—lots of buyers and sellers—the bid and ask price may be very close together. An ask price that’s much higher than the bid price indicates a less liquid market.

The single quote most often reported for a stock represents the price of its most recent sale.

In exchange for paying for shares of stock, their owners receive dividends (payouts of profits to shareholders). Just as often, however, investors expect to benefit from the share price appreciating over time (whether or not any actual dividends are issued): buy low, sell high.

We sometimes call a standard stock purchase “buying long” to contrast it with a “short sale”. A short sale is a special mechanism for trading on the potential that a stock price will go down rather than up. They can be vital strategic tools if you think the market or a specific stock is overvalued. They can also help balance your risk exposure.

We call the combined value of all outstanding shares of a stock its “market capitalization.” We can think of market cap, roughly, as the total value of a publicly traded company. We’ll often see companies categorized according to the size of their market cap as follows:

  • Nanocap (smallest)
  • Micro-cap
  • Small-cap
  • Medium-cap
  • Large-cap
  • Mega-cap (largest).

Note that these categories are informal, and mega-cap and nano-cap are sometimes folded into their neighboring categories. You can easily Google the precise dollar amounts used as the cutoffs for these categories (they change all the time to express consistent percentiles of the market in each category). But those red lines between categories aren’t really the point: market cap is all about getting a quick estimate of a stock’s relative size.

Large-cap stocks are traded my many people; they’re more likely to be stable and highly liquid. They’re also heavily researched by more people, potentially cutting down on potential competitive profit opportunities. Smaller cap sizes get progressively less liquid, but they’re more likely to be under-arbitraged.

What makes stock prices go up and down?
All this buying, selling, short selling, and more leads to stock prices that are changing almost all the time. The most dramatic changes happen in response to unexpected events (if the event was expected, some traders will have bought or sold the stock in anticipation). There are many terms and metrics that can be used to analyze stocks. You can easily spend a career trying to understand all of them. Luckily, that’s not necessary.

The most vital terms are associated with earnings — essentially profits. Over the long haul, we’d expect a firm’s ability to generate earnings to determine its stock price. It’s important to understand, however, that some very large and respected companies—like Amazon or Tesla—may have slim or even negative earnings for long periods of time. Investors don’t’ mind slim profits today if they see long-term growth potential.

Updates on a company’s earnings are one of the most frequent and important events causing stock prices to move. So important, in fact, that’s we’ve assembled a more detailed guide to earnings here.

For now, however, it’s enough to understand that earnings are a net measure of revenue minus expenses.

Of course, the long-term accounting of revenues and expenses can become a bit complex when dealing with global mega-corporations.

Other important metrics concern the firm’s balance sheet, its tally of accumulated debts and assets. Earnings are a flow (like the amount water going into and out of a bathtub each minute) and balance sheet assets/debts are a stock (like the amount of water left in the tub). You can read a bit more about basic balance sheet terms here.

Earnings are only one of many factors influencing stock prices, however. The factors ultimately driving all this movement in stock price are as numerous as the millions of traders in the world. A short list of the most vital includes:

Earnings

Announcements on earnings data.

Regulatory / Legal

News on government regulated products like pharmaceuticals or utilities. Antitrust proceeding can also dramatically influence a company’s value.

Analyst

Changes to recommendations from prominent financial commentators.

Technology

Tech breakthroughs can dramatically or incrementally build a firm’s value. Other technologies can disrupt an enterprise’s ability to generate profits.

Mergers and Acquisitions

Major purchases of other firms can create an enterprise that’s worth “more than the sum of its parts.” Investors might also try to buy a firm they expect to be acquired later at a more favorable price.

Macroeconomy

Macroeconomic events like interest rate changes, trade conflict, and growth reports influence different parts of the stock market in different ways.

Technical

Some investors buy and sell according to real-time metrics like “50-day moving average.” Thus, a stock crossing a symbolic point in a key statistic can cause a flurry of action.

Sectors of the Stock Market
Different enterprises have different models for generating profits, and that’s a fact we need to consider when analyzing stocks. For instance, a debt-load that’s considered a sign of poor management in tech (where capital costs are relatively low) might be considered very normal for a business that demands huge physical investment (like an oil refiner).

To help us make sense of these important differences, stocks are organized into broad functional categories called sectors. Since the entire publicly traded economy is sorted into just 11 sectors, we know the companies in each must still be very diverse. Indeed, within each sector we find a variety of more specific industries. Modern firms often have diverse business lines, however, and these classifications aren’t always clear-cut (think of Amazon, which is part-retailer, part device-marker, part entertainment-service provider, and part web-service provider).

For that reason, it’s best to think of sectors as useful abstractions to help in making valid comparisons, not ironclad guides to how every company does business.

We often think of sectors in terms of how they relate to the business cycle: the systematic tendency of the economy towards booms and busts. “Pro-cyclical” stocks are very sensitive to the business cycle: they rise faster during the boom and fall farther during the bust. “Counter-cyclical” stocks are less sensitive: their growth potential is limited, but they’re likely to fall less precipitously than pro-cyclical stocks in case of a market downturn.

A brief summary of each sector is presented below. You can click on any sector to read a blog post going into a bit more detail.

Finance

Different types of banks, various investment funds, insurance firms, and stock brokerages are among the most prominent components of this sector. In general, we would expect the revenue generated by this sector to come from loans, which earn more as interest rates rise. Since we expect higher rates in a hotter economy, the prototypical finance firm is seen as a pro-cyclical play.

Communication Services (formerly Telecom

This sector includes a diverse cluster of industries including wireless providers, cable companies, and ISP’s. These companies often feature stable, subscription-based revenues, but can also be vulnerable to dramatic technological disruption think of the decline of AoL.

Materials

This diverse sector includes resource extraction and processing operations such as mining, metal refining, chemical production, and forestry. One commonality: raw material producers are likely to be pro-cyclical plays, with raw material prices riding high during booms and falling dramatically during busts. Notably, this sector doesn’t include gas/oil/energy firms, which are so important to the global macroeconomy that they get their own sector.

Energy

These stocks include different levels of the energy production vertical in gas and oil, from exploration to production to refining. Obviously, the success of these stocks in tightly related to the path of global energy prices. Thus, these stocks are often traded as proxies for the expected path of energy prices as much as on individualized results.

Utilities

This includes electric, gas, and water companies. With limited growth opportunities (US utilities are generally run as public-private or highly regulated monopolies over a defined geographic range), these stocks are all about a fat dividend yield from stable long-term earnings. With stable earnings likely to persist in a downturn, this sector is traditionally counter-cyclical.

Real Estate

Сompanies invested in residential, industrial, and commercial real estate. These firms earn from both rental income and property appreciation. Like finance, this sector is highly sensitive to interest rate changes. Real estate is also highly speculative, rendering this sector pro-cyclical.

Technology

Everything from hardware manufacturers to software developers to IT firms. This sector continues to become a larger and larger portion of the economy: its underlying industries have such different business models that drilling down deeper than the sectoral level will almost certainly be necessary. It lost some heft when then FANG stocks departed for Communication Services in 2018.

Healthcare

Including diverse segments such as biotech companies, medical device firms, and hospital groups, healthcare returns can be heavily dependent on political events. They also present a unique nexus, however, of both growth opportunity (healthcare continues to grow as a share of the economy) and earnings safety (we’d generally expect healthcare spending to remain relatively stable during a recession).

Industrials

Including aerospace, defense, machinery, construction, and manufacturing, this sector once again requires industry-specific research. One commonality that’s been important in recent months: with large internationalized supply chains and international customers bases, these firms can be vulnerable to trade disruptions.

Consumer Staples

These final two categories attempt to sort consumer spending into more pro- and counter-cyclical categories. Staples includes firms where consumers are less likely to cut spending during downturns, like food, tobacco, and basic household products.

Consumer Discretionary

From media companies to retailers to apparel, these companies are perceived as more sensitive to shifts in consumer sentiment.

Picking a Broker
If you’re ready to get started trading stocks, picking a broker is the vital first step. A broker is the institution with the access and licensing necessary to execute your actual stock trades.

We recommend doing a bit of research on this topic: the internet has many great free guides to selecting a broker with detailed, up-to-date information on precise offerings of different providers. We focus on the essentials of this choice here.

Take a deep breath: picking a stockbroker can feel like a “merely” logistical decision (with a truly dizzying array of options).

In stock trading, as with all business, however, logistics goes a long way in determining ultimate profitability!

We can’t review every stock trading service here. So we’ll focus on a few big companies that are representative of two big categories of broker:

Traditional Full-Service Brokers

The only way for most investors to own and trade stock in the past, this model centers on networks of brick-and-mortar stores which employ brokers serving local markets (they also offer online trading options). This allows investors the chance to interact with their broker in person. Akin to retail outlets for the financial industry, these brokers often also offer other financial products in addition to stock trading services. Representative firms include Edward D. Jones, Merrill Lynch, and TD Ameritrade.

Discount Brokers

This model has mounted an increasingly robust challenge to full-service brokers in recent years. By forgoing the extensive physical storefront infrastructure, they boast a far leaner cost structure than more traditional firms—which translates into lower fees for customers. They likely can’t offer any in-person consultations, however. Robinhood is a prominent example of the discount brokerage approach.

More services can be nice, but they also have a cost: this decision is all about evaluating whether the additional offerings are worth the added costs. You should make note of one fact: the brokers employed across the country by full-service brokerages aren’t purely disinterested analysts. For better or worse, they’re virtually all paid by commission.

This site is quite useful for doing a nitty-gritty comparison of the fees brokers use to recoup these costs. At a high-level, basic stock trades cost between $4.95 and $6.95 at major full-service brokerages. If you’re a buy-and-hold investor who rebalances your portfolio once or twice a year, these fees will likely be relatively inconsequential to your overall portfolio returns. An active day-trader, however, could see his/her margins annihilated by these sorts of costs. Other non-trading fees can include:

  • Account maintenance fee: once per quarter or year.
  • Account inactivity fee: These fees can be added to an account that is inactive over a predetermined period of time.
  • Data feed/Charting Fee: data feeds from the broker, and/or a charting platforms, are often sold at an additional charge.
  • Miscellaneous fees: Other miscellaneous fees include phone brokerage services, account statement requests, etc.

Meanwhile, sites like Robinhood are offering $0 trades, while alternatives like Equites.com offer unlimited trades for a flat monthly fee. So what’s the catch?

Until recently, Robinhood couldn’t trade options (though they’ve begun implementing that functionality in 2018). You can’t short sell. Though users have access to ETF’s, they cannot trade mutual funds or bonds. Margin-trading cannot be conducted without paying for a Gold Account, which also comes with an added account minimum. Unlike many brokers, dividends are credited to a user account’s cash balance rather than automatically reinvested (again, not a big deal for day traders, potentially a major pain for buy and hold investors who will need to manually re-invest dividends).

We start to see the limitations that lead full-service brokers to charge fees in the first place come into view: after all, revenue for a site like Robinhood depends upon selling its users on Gold (and interest earned on cash balances). Still, a platform like Robinhood comes with the fundamentals—including real-time market data—needed to execute a profitable stock trading strategy.

They don’t offer in-depth research tools, but those are easier to find for free than ever before through services like Google Finance.

There’s no one right answer—it all depends on the strategy you plan to employ.

If you make your own investment decisions, a discount broker is probably the most cost-effective choice. Both kinds of brokers are licensed and insured. It's also important to realize that switching brokers is relatively easy these days. If you go to a new broker, they will gladly assist you in transferring your account.

Pay attention to the cost of a trade (whether per-share or per-trade), transaction fees, ease of deposits and withdrawals, the interest rate on margin borrowing, and account management fees. Choosing a broker is easier if you first determine the probable size of your account and the amount of trading you will be doing.

Learning More
If you’re interested in learning more about finding sustainable stock market profits, NewsQuantified continues to present a regular series of free, live virtual training sessions. We look at how data is helping smaller investors analyze trends in real-time and compete with big institutions for some of the most reliable profit streams in finance.
Live virtual training seminar series
If you’d like to learn more about using data to profit on earnings news (a practice hedge funds have been cashing in on for decades), we’re pleased to invite you to our ongoing live virtual training seminar series. You can claim a space in our next session using the button below:
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