Armed with an understanding of the stock market investors can earn substantial returns from investing in this asset class. Investing in the stock market can seem intimidating to newcomers to the market. However, investing in the stock market is not as scary as it may seem.
Let’s take a look at the essential facts of how the stock market operates.
1) What Is a Stock?
A stock, also referred to as a share, is a part of a company. When an investor buys a share of a company they are buying a small piece of ownership of that business. Companies raise capital for their business needs by issuing shares to the public.
To raise capital for investment a company executes an initial public offering (IPO) – this is done on a stock exchange.An IPO is when the company decides to sell shares of the business in exchange for investment from public investors – the company lists itself on the public market through the stock exchange.
The company uses the capital raised to grow the business, and the shares of the company continue to trade on the stock exchange after this time between buyers and sellers of the public. Shares traded in an IPO are referred to as the “primary” trading market and shares traded after IPO between external buyers and sellers are referred to as the “secondary” trading market.
3) Stock Exchange
Shares are bought and sold on a stock exchange – such as the New York Stock Exchange. In the case of an IPO the stock exchange acts as the middleman between the company issuing the shares and the public. In all other cases, the exchange acts as the intermediary between buyers and sellers of shares.
After an IPO traders and investors continue to buy and sell the shares of the company on the exchange, however, the company no longer receives any proceeds from this trading.
The stock market used to be a physical place where investors would meet to buy and sell shares – implemented through trading floors across the globe, in New York, London and Tokyo, for example. Stock trading prices were negotiated between real people in an ongoing open live auction.
Today, most trading takes place electronically. Orders to buy and sell are placed through brokers – who interface with the stock exchange and execute orders for investors. Most trading orders are processed through electronic systems and algorithms that determine in what sequence orders are executed.
5) Ticker Symbols Stocks are listed on the market by what is known as “ticker symbols”, also referred to as “tickers”. These are short form codes or names which make searching and communicating about each individual stock consistent, convenient and accessible.
Market participants track well known stock market indices as an indication of the overall performance of the stock market. Three of the most followed are the Dow Jones Industrial Average, (referred to as the Dow), the S&P 500 and the Nasdaq Composite.
The Dow is an index of stocks that follows the 30 top US companies, while the S&P 500 follows the 500 biggest US companies by market capitalisation and the Nasdaq Composite measures companies listed on the Nasdaq exchange – and is therefore heavily weighted to high-growth and technology businesses.
NOTE: This article is not an investment advice. Any references to historical price movements or levels is informational and based on external analysis and we do not warranty that any such movements or levels are likely to reoccur in the future
GENERAL RISK WARNING
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 74-89% of retail investor accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.