The Stock Market Explained
Many people have an interest in the stock market or in getting involved in investing in some way. While it’s not difficult to appreciate the appeal of investing in stocks, many people find that the idea is somewhat intimidating, as it can seem very complicated at first to begin understanding the stock market and how you can begin to invest in it. Investing in the stock market can be a great way to build up your net worth and assets, without needing to radically change your lifestyle or financial situation. This article explains the stock market in simple terms, as well as outlining some of the ways you can start to invest if you are not currently confident doing so.
What Is a Stock?
It is a bit difficult to break down into simple terms, but in essence, a stock represents a claim to a portion of the assets and earnings that a company accrues. Stocks can be bought and sold on the market by individuals and companies alike. If you buy a stock, then you essentially own a tiny part of the company.
There are two primary kinds of stocks that are available to trade. These are common and preferred stocks. The differences between these two are manifold, but the most important difference between the two for the average person who wants to get involved in the stock market is that ownership of common stocks generally affords one a say in key decisions and changes for the business involved. For example, if the business was to change leadership or elect a new senior position, then holders of any common stocks the company may have are often given some input, or they may be able to vote if there are several candidates for the role.
You may be wondering why exactly companies allow people to purchase stocks in the first place. Generally, selling stocks is a fairly reliable way to allow for consistently fast growth, as it provides companies with the capital they need to continue investing in their company. There are many ways for companies to do this, but selling stocks is faster and more dependable than, for example, trying to attract investors via crowdfunding or other methods.
Some companies sell stocks almost immediately after they are established. This is often done if their leadership feels that they need more capital at their disposal than they are able to access through a standard bank loan or through their activities. If this is the case, then the company may choose to go through the process of an Initial Public Offering. This means that the company is no longer entirely private and that the public can buy shares or stocks in it. It can also be a good opportunity for investors, who are skillful enough in spotting trends in the market and consumerism. Buying a share at this early stage is often advantageous, as it can become very profitable to sell them later on once the company has seen some success.
Once a company has made its stocks available on the market, the value of these changes depending on how they are evaluated by investors and traders. This fluctuation happens to all stocks, and it is generally determined by an algorithm or ratio. These analyses are fairly complex, but what this ultimately means is that the values of a stock are essentially out of your hands as a buyer. What is important is that you do your best to ensure that you make wise decisions in trading and that you do your research when you start trading in the stock market.
Stock Exchanges Explained
A stock exchange is essentially a marketplace where stocks can be bought and shared by investors and traders. It is worth mentioning that once a stock has been made available initially, it is no longer being sold by the company itself that the stock is in. Buying and selling stocks on a stock exchange is essentially a process between two second parties, and companies do not often actually buy or sell their own stocks after initially making them available for purchase.
The first stock markets to appear in America began to crop up in the 18th century. The New York Stock Exchange is renowned around the world for its importance and influence, and it was actually established all the way back in 1792. This was a key moment for the history of commerce and finance in the US and, arguably, globally.
At the time of the founding of the first stock markets, it was obviously not an entirely safe practice, as there were limited opportunities for regulation or for the authorities to ensure the honesty of practices and trends in the market. Now, there are many regulations and insurances that apply to the stock market, which allow people to have much more confidence in engaging in the practice of buying and selling stocks. The stock markets of the world are also linked together today, which means the process of buying and selling between markets has been made much smoother than it has been in the past.
It is also possible in some instances to buy stocks in an over-the-counter fashion, and these are also known as bulletin boards. Buying such stocks can be a risky move, as they are usually listed in the first place because they have not met the standard criteria for listing in a major stock exchange. Such criteria often concern how long the company has been operating or how profitable it is. Stock exchanges in many countries are essentially able to set their own rules and standards to a large extent. While it can be risky to buy over-the-counter stocks, it is not something that should be written off altogether, as it offers access to stocks that would not be available otherwise and which may be very lucrative.
How are Stock Prices Decided?
Generally speaking, the price of a stock is determined and changed by the auction process which it goes through. Prospective buyers bid on the stock, and traders set a price that they think the stock is worth and wish to sell it at. Stock markets are essentially made up of buyers and sellers, and they are the ones who are influential in determining the prices of the stocks, among other things. Many people do not engage in the stock market themselves but through employing the services of a stockbroker. A stockbroker is essentially someone who can do the buying and selling for you, eliminating the need for you to get directly involved with the process yourself. This may be something for you to consider if you are interested in beginning to invest but do not wish to occupy much of your time with the process of actually engaging in the stock market directly.
If you wish to find a stockbroker to trade in the market for you, your best bet is likely to be finding a retail broker who you can start an account with. There are many different ways to do this, and now it is generally possible to do so online by using brokerage websites or software. This makes it much easier than it has been in the past to find a broker to work with, and in many cases, this software allows you to be very involved in the process. You can also find a broker at a brick-and-mortar brokerage, which may be less convenient but is, of course, more personal. Ensure that you find one that has a good reputation.
Supply and Demand on the Market
The concept of supply and demand is generally crucial within the world of commerce in general, and the stock market is certainly no exception. For every trade that takes place, there obviously needs to be both a buyer and seller who are willing either to part with the stock or to buy it. Generally speaking, if there are more interested buyers in a stock than there are shares available, the value goes up. The inverse is usually true too. This means that the market is a pretty good example of the concept of supply and demand in real time.
Is Investing Worthwhile?
Beginning to invest can be an intimidating undertaking in many ways. However, it does not need to be. There are so many ways to get involved in the stock market, and all you really need to start with is an amount of money that you are willing to experiment with. There is no reason you can’t start small. There is plenty of research which demonstrates that investing in stocks can be a fairly dependable way to build up your financial assets and capital over time.
While many people have alluring success stories of investing in huge companies when they were small and subsequently experiencing incredible gains upon selling these stocks, this is not very typical. While you can certainly try to predict the future of newly founded companies based on their profile and target audience, if you do not want to take too many risks on the market, it is generally wiser to invest instead in companies that are established and have a good track record of growth and success.
It is also possible to give swing trading a try. However, this is generally a pretty risky practice and involves closely monitoring the market nearly constantly, buying or selling stocks when they are at their most or least valuable point. This often involves a lot of guess work, and it is certainly not advised for those who may be risk-averse or who do not want to risk losing the money they invest, as the process is quite similar to gambling in many ways.
