What is the stock market and how it works?

0
90

The stock market is a public place which involves issuing, selling and buying of shares. You can either trade on a stock exchange or over the counter stocks. As the stocks dealt in the market are mainly equities, it also means you are dealing in the transacting fractional ownership of the company. 

What is the stock market?

The stock market is a market place where people come to buy or sell shares of publicly listed companies. It provides a platform for people to carry out a seamless exchange of shares. However, a person can only carry out a transaction in the stock market with the help of a registered intermediary known as a stockbroker. Nowadays, the transaction mainly takes place through an electronic medium. 

By buying a share of the company, you are purchasing a part of their ownership and investing in it. Thus when the company grow, the value of your share also grows. Once you find that the share has reached its maximum limit, you sell it to gain profit. 

There are various factors upon which the price of the share can depend. Thus, sometimes the cost can fall and sometimes it can rise. 

You may have heard about the bear market and bull market. Many people do not have the required knowledge about it. A bull market is the place where the stock’s value keeps on increasing, whereas the bear market is the place where the value keeps on decreasing. 

What is the stock market index?

You can track the stock market’s overall performance through three principles, the S&P 500, Dow Jones Industrial Average, and the Nasdaq. Many countries have their own indices.

The most significant five indices include Hong Kong, Tokyo, Shanghai, London and Euronext exchange. You can track each exchange by their index or can look for global index to measure the stock performance across the borders. For example, the MCSI index depicts stocks’ performance in the emerging market across countries like Brazil, China, and India.

How does the stock market work?

If you are a beginner and investing for the first time, then the thought of investing may scare you a lot. But don’t worry, you are not alone by understanding how the stock market works you will understand how to invest. 

You can think the stock market to be a safe platform where buyers and sellers can negotiate price and trade investment. A stock market is a network of exchanges where company come to list their shares on an exchange. The shareholders or traders then purchase, buy and sell shares among one another. Investors look after the significant fun and control lots of money, plus the individual can only buy with the help of a broker.

The stock market provides a physical space to stocks, including the New York Stock exchange and the American Stock exchange. Today the securities are more commonly traded through several best trading apps platforms that have come together. Recently the transaction is mainly taking place through electronic form and not in person.

What do you mean by volatility in the stock market?

Volatility measures how fast the stock price is increasing or decreasing for a given set of returns. Moreover, it also denotes the risk that comes with a varying cost of security. It is expressed by calculating the standard deviation of the annual returns collected over a while. In simpler terms, it is the measuring instrument that calculates how fast the value of securities or market indexes moves. 

You can either measure the volatility through a variance or standard deviation. In either case, if you find the value of the stock is high, the more volatile are the value or the returns. In contrast, if you find the standard deviation is low, it indicates the value is low and closely knit across a narrow range. 

Why is share market important?

Share market helps the company to raise capital for growth and expansion. The company issues share in public through IPOs and in return, they give fund that they can use for various purposes. After the company issue their shares in the IPO, they get listed in the stock exchange. This listing even allows the common man to invest in the company. Moreover, it increases the visibility of the company as well. 

You can be investors or traders in the share market. The difference between traders and investors is that traders hold stock for a short period, whereas investors hold stock for a more extended period. Depending upon your need, you can choose whether you want to be a trader or investors. 

Investors invest in the company with the view to earning ample profits to fulfil their life goals. It is one of the major purposes why investors invest in this platform as it provides them with the advantage of liquidity. Depending upon the liquidity you can buy or sell share anytime. So, you can convert the financial assets to cash anytime you want. It provides you with a lot of opportunities for collecting wealth. 

You can earn money through the following ways:

  • Capital growth
  • Dividend
  • Buyback

Dividends

These are the earning of the company that are distributed as cash among the shareholders. The ratio of distribution depends on the number of shares you hold.

Capital growth

If you invest in shares or equities in the company, it leads to capital appreciation. The longer you hold the investment, the higher is the return. However, they are associated with greater risk. The amount of risk you can afford depends on your dependents, age and need. So if you are young you and you don’t have someone dependent on you can invest in the equity shares. But if you have people dependent on you or have commitments, you should allocate more money in bonds and less on equity. 

Buyback

The company buy back its share from the investors by providing higher value than its real market value. So buy back shares when it has greater value or consolidates its ownership. 

Bottom line 

The stock market is the best way to invest when you want hefty returns and help beat inflation over time. You can earn both by holding and trading. Thus it is an excellent option to accumulate wealth, given you have appropriate knowledge about it.