Are you to become a trader? Or are you just starting to know what a stock is?
Either way, getting to know the platform - the market - where you probably will do your affairs is a must-know. If we follow the academic literature and the theory of market efficiency then we should expect that the market - most of the times - acts accurately in pricing stocks. However, as it usually is when it comes to the world of academics, its concepts are more applicable in theory than in practice. In real world, in real markets without any assumptions sometimes the price of a stock does not reflect its value; sometimes the particular asset is mis priced. To understand the logic behind this, One should know about Ben Grahams brilliant metaphor mr. Market. It normally functions as the most brilliant metaphor ever created explaining the mispricing of stocks.
The Manic-depressive mr.Market does not always price stocks the way you or I would value a business. For an example, when stocks are going up, he, being a lunatic pays happily more than their objective value and when the stocks are going down he sells them for less than their true worth.
"Would you allow a lunatic to come by at least five times a week to tell you that you should feel exactly the way he feels? Would you ever agree to be euphoric just because he is - or miserable just because he thinks you should be?" These are the questions asked discussing mr.Market in the commentary section of chapter 8 of Ben Grahams book "Intelligent Investor" . The answer to these questions is of course not. Every person would insist on their rights to take control of their own emotional lives, based on their experiences and beliefs." However, when it comes to their financial lives, millions of people still let mr.Market tell them how to feel and what to do - despite the fact that he from time to time can get crazier as hell".
Just look at the recent financial crisis. Many companies lost more than half of their market values although they still earned the same money they had earned before the crisis hit. A fear was manifested inmr.Markets decision to sell assets for less than their true worth - which resulted in declining stock markets all around the world. Of course, sometimes these declines were justified. Some companies were in great trouble but many were not affected to a greater extent at all. This was evident later when the stock markets experienced a boom.
Of course, it is hard to know when mr.market acts stupidly. One intelligent investor - as described in the book - should therefore try to do as much research as possible to be able to take advantage onmr.Markets decisions. The investor should do business with him, but only when it serves your interests. As mr.Markets job is to provide the prices, your job is to decide whether these prices are correct or not.