Beginner’s Guide: How the Stock Market Works
Any person who wants to increase their capital will inevitably have to face the concept of the stock market. Stocks are the most popular way to invest money, as they allow you to make multiple profits and are a popular product that allows you to quickly buy and sell them. But how does stock exchange work? In this article, we will explain to people who are new to this how the market works and why you need to know how stocks work.
What is the stock market?
The main word in this definition is the market. Since this is a market, therefore, there are sellers offering a certain product, and buyers who buy this product. In the stock market, these commodities are usually stocks (shares) of public companies. The efficiency of the economy functioning directly depends how stocks work. The circulation of securities, which stocks are part of, contributes to:
- Redistribution of funds between countries, industries and enterprises.
- Attraction of investments necessary for the development of individual enterprises and industries in general.
- Setting of the owner rights to the enterprise assets or debt obligations, depending on the type of securities.
In the overall structure of the market, there are two main levels:
- Primary – offering new stocks
- Secondary – trading of stocks that have already been issued and purchased in the primary market.
The secondary securities market, in turn, is divided into:
- OTC (Over-the-Counter) – transactions are done without intermediaries between two parties who assume all possible financial risks on operations since no one supervises the exchange.
- Exchange – the purchase of securities occurs without the obligatory presence of the issuer. The exchange platform acts as a guarantor of the fulfillment of all obligations under the transaction.
Securities issue to attract money. Before issuing securities, the issuer estimates how much money he or she needs and in what form. A company can simply borrow money from future buyers of securities, promising them to pay a percentage in the future. In this case it issues bonds. But how do stocks work? The company can also get money by offering buyers to become co-owners of the company – to divide its capital into parts and sell them. In this case, the company will be selling stocks and the investor will be buying and owning a portion of this company.
Why do I need to learn how the market works?
The stock market is a huge and complex system that obeys certain laws and rules and plays an important role in the economy of each state. And if you want to learn how to manage your money, spend wisely and increase capital, then you should understand how stock trading works, how you should treat your investments and what to do to multiply your capital, then before you do any action the first questions you should be asking is “How does the market work?” and only then learn how you can participate in this stock market. Do you want to make money buying and selling stocks? Then without understanding how the stock market works, you will not know when to buy or sell stocks and which stocks to buy. Many people imagine the stock exchange as a noisy place where people with three phones in their hands shout out their bets, but these times are long gone. Now almost all the activity of the exchange is conducted in electronic mode. So, how does the stock market work?
Buying and selling stock: How does the stock market work?
If you want to know how selling stock works, you need to first understand how the stock market works. The stock market is a mechanism that ensures the transfer of funds from one sector of the economy to another. The participants of the stock market are:
- Investor – a natural or legal person who invests in the securities of various companies in order to obtain a steadily growing income in the long term.
- Issuer – a company that deals with the issuance of securities. Most often this is done when there is a shortage of funds in the planned budget.
- Professional dealers, brokers, traders, etc. – companies and individuals who have undergone the procedure of appropriate licensing. They carry out intermediary services between the issuer and the investor.
If everything is quite simple and clear with issuers and investors, it is a little more difficult with professional participants. Let’s try to explain what the peculiarity of their work is. Unlike investors, they do not acquire stocks for themselves, but participate in bidding on behalf of their clients. Therefore, they serve as intermediaries. The purpose of their work is to increase the capital invested by the client by performing certain operations in the stock market. In fact, they are engaged in speculation “buy cheaper, sell for more.” These intermediaries receive a cash reward in the form of a percentage of the income received from selling the stock for more. In addition, in order to be able to work on the stock exchange, they are required to prove their competence and obtain the appropriate license. To make it easier to understand, we will give a simple example. There is a company that produces a certain product, and it does not have enough money to continue production. To get this money, the company issues certain securities to the stock market. At the same time, investors who are willing to invest money in this company will buy these securities (stocks) on their own or through intermediaries in hope that the company’s value will increase, and they will be able to resell them at a higher price. This is how the market works in a nutshell and if you want to learn this topic more in depth, there are many courses that will teach you everything you need to know how the stock market works.