WHAT IS STOCK MARKET AND HOW IT WORKS

WHAT IS STOCK MARKET AND HOW IT WORKS

Investing in the stock market can seem like a crazy prospect for a generation of young adults that have two cents in their pocket and $100,000 student loan for degree that they don’t use but when it’s done right, you can take that two cents turn it into three cents and well that’s more than you had yesterday and isn’t that the goal.

in all seriousness, the stock market is often perceived as a big scary abyss of money that eats unsuspecting investors alive and is the path to a magnitude of wealth for those that understand it. while those perceptions can be true understanding the stock market and succeeding in making money with it is far easier than you might expect.

WHAT IS STOCK MARKET?

In order to understand the stock market first we need to understand just what a stock is, a stock otherwise known as a share is a financial token or instrument that signifies ownership of a company in some proportion. if Amazon had 1000 shares and you bought one share you would own 1/1000 of Amazon.

STOCK MARKET

In reality Amazon and companies alike have millions of shares but that sums up the point when you own a stock that means that you own a portion of that company and as the value of that company increases so does your stock price.

WHAT TYPES OF STOCK ARE THERE IN STOCK MARKET

There are also common and preferred stocks which refer to the voting rights of shareholder common shares have voting rights and preferred shares don’t, when you have voting rights you can vote on things like board elections, mergers and other financial decisions. preferred shares however are called that because they get preference when a company pays a dividend which is basically a split of the profit of the company with the shareholder and they also get preference in other financial situations stocks can get much more complicated than that but these simple understandings will serve enough to the basic investor.

The next thing you might be wondering is why exactly companies will sell stocks and that answer is simple, “to get money”.

HOW COMPANY SELL STOCKS IN THE STOCK MARKET

Stocks allow a company to raise massive amounts of operating capital with essentially no extra effort or product. The modern stock market often bases the value of a company off its potential earnings down the line this means that relatively small companies can earn millions or even billions if investors think that they can succeed in the future so then if a company wants to sell their shares they need a place to do it

To enter the stock market, companies list shares by selling them through an initial public offering or IPO on an exchange is essentially changes the status of a company from a privately held business to a publicly traded company.  IPOs can let Co-founders cash out their stake or just let the company raise money, once a company stocks are listed on an exchange the public can trade them.

Usually prices will fluctuate based on public opinion but the more concrete trends and fluctuations are usually dependent upon a company’s earnings and operations, these can be measured by P/E ratios or price to earnings ratios as well as a variety of other metrics.

WHY PRICE KEEPS CHANGING IN STOCK MARKET

This is usually where casual investors get scared and their eyes start to glaze over but fear not it’s not as complicated as it sounds. We need to understand how and why a share price fluctuates, the stock market is composed of millions of investors and individual traders who all feel different ways about a company, they all make independent choices and the net of those choices result in the positive or negative movement of a stock.

If more people buy than the price has to climb, if everyone wants out of a company then the price falls due to lack in purchasing demand. I.E. say you post something on Craigslist for $100, after posting you get 100 emails saying they’ll come to purchase your item all cash, right now most people at this point might start thinking that they priced their item too low and thus raise the price until in theory it reaches the most that the one single last buyer will pay for it.

Conversely if you received no offers you’ll likely keep dropping the price until someone bites, this is similar to how the stock market moves except that the price rise and drop isn’t done consciously, millions of transactions every second supply and demand which brings us to that topic for every stock purchase or sale there has to be a buyer and a seller.

“If there are more buyers than the price will go up if there are more sellers the price will go down”, traders often might talk about the bid ask spread which basically means the difference between the bid or what someone is willing to pay to buy a share and the ask or what someone is willing to sell a share for supply and demand is fairly simple to understand.

At the end of the day if more people want something, that thing in this case a stock will be more expensive. at the start of stock markets, matching buyers to sellers was done manually on a trading floor now it’s mostly done automatically by trading systems, this allows the market to move much faster and creates the breakneck pace than any casual onlooker notices when watching the stock market.

Now you might be wondering well I don’t have time to understand this why should I even invest anyway when I can earn 2 to 3% just keeping it in a bank, on the high side well the answer is pretty simple, if you do it right you can make a lot of money, using a common example that you might have heard “if you bought $1000 of Amazon stock back in 1997 you’d have roughly $1.5 million today” now that’s a long investment timeline but I think most people would agree that the purchase would be worth it.

Other companies often provide return rates like 30 to 70% each year which is still going to build you a lot of wealth compared to that 2 to 3% each year kept in a bank account, in essence as long as you’re able to make more than 3% in the stock market you’re doing better with your money than just keeping it in the bank.

HOW TO START YOUR JOURNEY IN STOCK MARKET

Now that we understand the stock market to be a real time marketplace where you can purchase a part of companies you think will succeed, the first thing you’ll need is a trading account you can start one with common providers like E*TRADE or other major banking institutions but you can also use free trading services like Robin Hood.

Common trading services will charge fees for every trade you make but new tech companies like Robin Hood have made everything completely free, that means you can invest all of your money in a company and not worry about paying fees to the brokerage, once you have an account in any trading service you have to decide what companies or multiple companies stock to purchase, which is arguably the hard part.

You also must have a certain amount of money; stocks range from a few cents to many thousands of dollars. The key thing about stocks is that you can’t purchase part of one, it’s either all or nothing. If you want to invest in Amazon you’ll need at least $ 85.25 at the time of recording to get started but you can buy much cheaper well rated companies for a few bucks.

Before you make a purchase, you want to do extensive research to make sure you understand what the company does to make money, whether they’re in good financial standings and also see what experts think about a company. Whether you should buy it at the end of the day you do have to assume some risk, Before you make a purchase, you want to do extensive research to make sure you understand what the company does to make money, whether they’re in good financial standings and also see what experts think about a company. Whether you should buy it at the end of the day you do have to assume some risk.

Are you a beginner or you are trading for a long time, let us know in the comments below and click to read about latest news about share market and commodities.

Leave a Reply

Your email address will not be published. Required fields are marked *