Nowadays, investing in shares is one of the most effective ways to accumulate capital, build wealth and earn passive income. Before you start, however, you should know exactly how the stock market works.
Stocks of publicly traded companies can be bought and sold on the stock market. They represent something like auctions where potential sellers announce their “ask price” and potential buyers – their “bid price”. The difference between the two is called “spread”. The spread is the commission the intermediary, connecting the buyer and the seller gets in exchange for the service.
2. Primary functions of the stock market
The stock market is where the stocks of publicly traded companies can be accessed. This is the place where the sellers meet the buyers and vice versa. The market, however, is really complex and strictly regulated, and prices of stocks themselves can change dynamically.
The main functions of the stock market are 3: buying, selling and issuance. Every time a share is bough, someone had to sell it. In this sense buying and selling are the two sides of the same transaction. And when a company wants to raise additional funds, it can issue new shares to sell on the stock market. This can be done by initial public offering if the company goes public for the first time, or a secondary public offering.
Stocks, however, are not the only thing traded on the stock market. Other types of securities such as exchange traded funds and mutual funds can also be bought or sold on the stock market.
3. What are the risks?
Prices can rise the same way they can fall. Sometimes the movement can be quite drastic. The scenario where the price of a stock falls to zero and you lose all your invested funds, is also possible. This is why before you invest on the financial markets, you should have a carefully planned strategy and you should be aware of the risks you are taking. This article does not contain any investment advice or recommendations and is written only for information purposes.
4. Who are the stock market participants?
Here are the main participants in the stock market:
• Retail investors – they can buy or sell shares through their brokerage account
• Brokers – they are stockbrokers which have been through a special training and have passed an exam so they could get licensed. Brokers work for investment intermediaries and place orders on behalf of their clients, for which the intermediaries charge commission fees
• Portfolio managers – manage large funds such as mutual, pension and other funds and usually buy or sell large quantities of shares
• Investment bankers – help companies list shares on stock exchanges
5. Examples of stock markets
The two biggest stock markets according to their market capitalization are located in the states. These are The New York Stock Exchange and NASDAQ. Other more prominent stock exchanges include Euronext, Bombay Stock Exchange, TMX Group, Deutsche Boerse, Shenzhen Stock Exchange and Shanghai Stock Exchange. The companies from a certain geographical region usually trade their shares on the regional exchange. But all of these exchanges are accessible by traders around the world. Also, keep in mind that sometimes shares of a certain company can trade on more than one exchange.