The stock market is a marketplace where companies and investors trade stocks. Several companies go through this market to raise capital by selling stocks or a fraction of company ownership. A large number of investors trade stocks to earn profits.
Note that investing in stocks is one of the most popular ways for individual and institutional investors to build wealth. However, it has its notable disadvantages and several risks. This article explains what the stock market is, how it works, and where to invest.
What Is the Stock Market?
There are several stock markets in the world. Most developed and developing countries with established free-market economies have their respective markets. Each represents an aggregate of sellers and buyers of stocks in that particular geographical confine.
All stock markets have one particular purpose: to facilitate the transaction between sellers and buyers. Remember that it is a marketplace for companies to raise capital and for investors to invest. Both companies and investors can be both sellers and buyers.
When a company issues and sells stocks, it is telling its investors that it needs to raise capital because it believes that it will perform well in the future. Meanwhile, when an investor buys its stocks, he or she in effect places a bet that this company will do well.
It is also important to note the goal of the stock market is to create a supply and demand equilibrium for stocks. It enables market participants to negotiate prices through the same forces of supply and demand that govern other marketplaces.
Stocks of so-called public companies are traded on stock exchanges while the stocks of private companies are traded on equity crowdfunding platforms. Numerous transactions within the market facilitate the flow and formation of capital.
The stock market is sometimes called the equity market or the share market. Most media organizations also use the term “stock market” when reporting or talking about the performance of stock exchanges and stock indices.
How Does the Stock Market Work?
The stock market works just like most marketplaces. Someone sells something in exchange for cash and another participant buys something using cash. In the realm of finance and investing, the stock market trades stocks or fractional company ownership.
Companies aiming to raise funds to finance their operations or expand their businesses issue stocks and sell them through this market. Investors seeking to benefit from the profitability and favorable outlook of these companies buy these stocks through the same market.
If a company does well, its investors can earn profit either through dividends or when they sell their stocks that have appreciated in value. However, if this company does not do well, investors can lose the value of their investment and even end up having no stocks.
Companies seeking to access a larger pool of investors go through stock exchanges. A specific company will list shares of its stocks on an exchange through a process called an initial public offering. This company then becomes a publicly-traded or listed company.
There are different factors that affect the value or prices of stocks. These include macroeconomic influences and microeconomic factors. It is still important to highlight the fact that stocks traded in stock exchanges also follow the law of supply and demand.
A stock market that does well is indicative that a lot of people are looking to buy stocks. The prices of these stocks go up. If it does not do well, it indicated that there are not as many people looking to buy stocks, thereby stock prices go down.
Where and How To Buy Stocks?
Stock trade used to take place in physical markets. However, due to the developments in information and communication technology, most stocks, especially in exchanges, are traded electronically through the internet and online brokers.
There are two ways to invest in the stock market: direct ownership of stocks or participation in pooled funds composed of stocks or equities. Most investors also invest either as active investors or passive investors. Some invest both actively and passively.
Owning stocks is as easy as opening and setting up a brokerage account online. Most brokers have online platforms coursed through their websites or even a mobile app that allows investors to buy and sell stocks using their cash or even their credit cards.
Some investors also buy stocks through portfolio managers. These managers are responsible for placing buy and sell orders, as well as for helping their clients build and maintain their stocks portfolio through investment strategies.
Participation in pooled funds will require going through financial services providers that offer pooled fund products such as mutual funds, unit investment trust funds, exchange-traded funds, and even investment-linked or unit-linked insurance policies.
Note that there are strong reasons to invest in stocks. However, remember that investing in one has several risks. It is important for beginners and even seasoned ones to ask themselves pertinent questions about their investment goals and objectives.