The stock market is about trading but it’s not like a store where you buy or sell groceries. When it comes to the stock market, it’s either you walk out richer or poorer. Is it the countless stories of investors who have lost their hard-earned money in the stock market world? Or the technical and market jargons newbies have to deal with. Or the volatility and other risk associated with trading in the stock market. These and many more are reasons why many found the stock market a challenge.
However, investment in the stock market can be one of the most profitable ways to build wealth if you know how to play your cards right. In fact, most of the world’s most wealthy people are known to own stocks and trade in the international market. Hence, with discipline and adequate knowledge of the market, you can eat your own share of the cake. To understand how the stock market works, let’s get deeper into this.
What is a stock?
A stock is a type of instrument that entails owning a fraction of a company’s assets and earnings. When you buy company stocks, you lay claim of a small piece of that company in terms of shares. That is why many purchase stocks of companies that seem to be profitable and promises to go up in value.
A stock market is where stocks are traded, that is where buying, selling and issuance of stocks regularly take place. It is a collection of markets where investors and individuals engage in shares trading. Although there is a physical market, the advancement in technology has brought about a transformation in the stock market. Stocks can now be traded electronically and buyers and sellers can be easily matched together on connected networks.
How does the stock market work?
The stock market simply entails negotiation of prices between buyers and sellers and placing trades. But, there are a lot of things involved and they will be broken down in these concepts.
The stock exchange can be referred to as an aftermarket wherein existing securities are traded among investor through an intermediary.
Companies most times require huge fundings to grow their business or put a business dream to reality. Hence, they issue shares of their stock on an exchange through an initial public offering. The first investors buy these shares to allow the company to raise the capital.
Then, Investors buy these stocks among themselves through a stock exchange. This means they aren’t buying directly from a company or selling directly to the company. Rather, buying and selling take place basically between investors on the stock exchange. That is a secondary market consisting of buyers and sellers without the issuer of shares. Hence, trading is basically between investors.
Although there are other stock exchanges, the largest and most recognised stock exchange is The New York Stock Exchange(NYSE) and NASDAQ, United States. There are also over-the-counter (OTC) exchanges where small and medium businesses who don’t meet the strict guidelines of large exchanges can raise capital.
It is important to also state that these exchanges are regulated in order to provide a secure environment for investors to trade.
Setting share prices
There are different factors that influence the prices of shares. However, one of the most common ways prices are set is through bid and ask spread. This means the highest price at which a buyer is willing to pay for a financial asset (bid) and the lowest price a seller is ready to accept(ask). The difference between the bid and ask is the spread and it can affect the price at which an asset is bought or sold.
Share prices are also determined by supply and demand. If there is a high demand for a particular share in the stock market, the price will increase. Investors sometimes can have a positive sentiment towards the value of a particular stock. This can increase demand thereby driving the prices of stock higher.
A stock index is a well-known tool used in tracking the performance of the stock market. Analysts make use of indices to understand how a group of assets is performing. This is done by measuring the weighted average value in order to make an informed decision. Some of the popular indices used are Dow Jones Industrial Average (DJIA), S&P 500, Sensex and many more.
Hope this explanation of how the stock market works can help ease any anxieties and get you on the right track to trading success. While at it, it is important to choose the right intermediary, that is a stockbroker that can help you through while trading on a stock exchange. As much as stock market carries risks, there are potential gains as well when you get a grip on it.