Understanding the world of investments and the stock market can be overwhelming. For starters, think of the stock market as a place where the magic happens.
According to Oliver Elfenbaum (2019), the stock market concept originated in the 1600s, when the Dutch East India Company used many ships to carry goods and trade around the world. However, since operating ships and travelling can be expensive, they invited private investors to fund these travels for a profit in return. Meanwhile, the modern stock market can be a lot more complicated than that.
In this article, we’ll discuss the basics of the modern stock market and the things you should know to get started with your investments.
What is the Stock Market?
The stock market is where investors, buyers and sellers, trade shares through publicly traded companies. These companies allow private investors to invest to raise their capital and give higher returns.
Not all companies offer public shares. At first, if a private company striving to improve their business, they usually go to bank loans or rich investors. Fortunately, if both options aren’t available, they can still opt for IPO or Initial Public Offering, that’s when they become a public company. Eventually, everyone can be a partial owner of the company as long as they invest.
Key Components of the Stock Market
1. Stock Exchanges
Stock exchanges serve as the secondary market or platform where specific transactions happen, such as the buying and selling of stocks. In addition, stock exchanges cater to limited assets, including EPTs (exchange-traded products), stocks, and bonds.
If you’re now yet familiar with how to trade shares, you should be aware that there are various stock exchanges, such as the London Stock Exchange (the first stock exchange ever), Nasdaq, and NYSE (New York Stock Exchange). These exchanges regulate the flow of the supply and demand of stocks, and the infrastructure for a more controlled trading.
2. Stocks
Another essential component of the stock market is the stocks, which can either be equity or shares. As mentioned, owning stocks in a public company allows people to be partial owners of the business. Additionally, partial owners are entitled to some perks from the company, such as voting rights, ownership, and claiming dividends. Of course, the level of power a specific shareholder has depends on the company’s regulations. So, before investing, you should be aware of the basics of how to trade shares or equity, and trading in general.
3. Indices
An index is known as a basket of stocks, which also represents the current status of the group of stocks. An index may or may not consist of stocks from the same industry. For instance, major indices, such as the S&P 500 (Standard and Poor’s 500) and Financial Times Stock Exchange 100 (FTSE 100) Index include the top-performing companies from the US and London, respectively.
However, the specific requirements for companies to be included in the popular indices aren’t usually disclosed.
Meanwhile, as a trader, if you want to be updated on the current market trends where your stock investments are included, relying on market indices can be helpful.
4. Brokers
If you’re just getting to know how to trade shares or equity, choosing the right broker can help you get started in a better shape. Brokers facilitate the transactions between the buyers and sellers.
Stockbrokers can be individuals or firms that execute orders from customers. Nowadays, you can open an online trading account from various brokerages, which allows you to trade using your preferred trading platform.
Once you have a trading platform from your chosen online broker, you can create a demo account to test your trading strategies, and even start real online trading.
How does it work?
In summary, the stock market is the generally regulated environment where stocks are being traded.
There are two types of companies in the stock market, private and public. Private companies have shares that aren’t available in the stock market. Usually, these are owned by a small group of shareholders. On the other hand, public companies have shares available for public trading.
Since public companies allow anyone to trade or invest their shares, the investors are also partial owners of the company. Additionally, they have specific rights, including voting, claiming dividends, and ownership. However, the rights of the investors still depend upon the weight of their investments.
Meanwhile, since there are various factors affecting the movement of the company shares, investors look after the performance of indices. If you’re a shareholder in a company that belongs to an index, paying close attention to its performance can help you make the right decision.
But before you start investing in stocks, looking for the ideal broker can be helpful in your investment journey.
Final Thoughts
If you’re planning to invest in stocks, you might be confused about where to start. But just like any other venture, knowing the basics and understanding the concepts of how the stock market works can be a great foundation for your journey.
ABOUT THE AUTHOR
Aliana Baraquio has over 5 years of experience as a writer and market analyst. She specializes in developing beginner-friendly trading techniques and tutorials. Additionally, she suggests FP Markets as the top broker for trading CFDs and Forex.
