The term ‘stock market’ scares many to the point of shying away from it. But it is a viable investment that can work for anyone as long as you understand it. This article unpacks the jargon to give you a little understanding of how the stock market works.
A stock market is a place where investors meet to buy and sell shares. When you buy a company’s share, you are buying a piece of it. Before, investors would meet in an open market but today they meet electronically. You access the electronic markets through a broker. How companies get into the stock market
Start of business
The stock market business starts when a company needs to raise money. It thus issues shares also called stocks. This is done through an Initial Public Offering (IPO) in which the price of shares is set based on how much the company is estimated to be worth, and how many shares are being issued. The company gets to keep the money raised to grow its business, while the shares continue to trade on an exchange. Traders and investors continue to trade a company’s stock after the IPO because the perceived value of the company changes over time.
Once the offering is completed, the price of the shares moves independently from the actual company success. Price changes reflect supply and demand, so when a stock is deemed desirable for whatever reason — recent success, a strong industry sector or popularity – then the price goes up. When a broker or an investor is buying stocks, they find them listed in the market with short known names called ticker symbols. As an investor, you just search on the current price on the ticker symbol and it gives you the most recent price.
It’s good to note that the price of shares Understanding the moves very quickly as it is determined by the latest news and investors’ mood. Experts point out stock exchange as one of the best ways to invest your money, as owning stock entitles you to be part of the company’s earnings and assets. Stocks can increase in value, which is called capital appreciation, and they can also decrease in value depending with the market demand.
In addition to capital appreciation, some stocks also allow you to be paid a portion of the company’s profits. That’s called a dividend stock and it distributes dividend payments to stockholders depending with their shares.
Pros and cons of investing in stock
There are many advantages of investing in stocks. The biggest advantage is that they offer the greatest potential for growth although it’s not a guarantee that they will grow. Additionally, you can buy the amount you can afford. Mature and established companies also pay dividends (a cut of the company’s profits) to stakeholders mostly on an annual basis.
The major disadvantage of investing in stocks is the fact that their price is volatile – it keeps on fluctuating depending on the season. News and earning forecasts are some of the triggers that cause investors to buy or sell shares and that affect the market. Wrong timing in investing in stocks could see you lose a lot of your money. If you aren’t familiar with the business, it’s advisable to look for an expert to help you manoeuver through it. What you need to know about stock market
Trying to predict which stock will rise or fall, and when, is very difficult as investors don’t have the same agenda, which leads them to buy and sell stocks at different times. One investor may hold stock that has grown significantly in price and sell to lock in that profit and extract the cash.
Another trader may have bought at a higher price than the stock now sells for, putting the trader in a losing position. That trader may sell to keep the loss from getting bigger. Based on their own research, investors and traders may also sell their stock because they believe a stock is going to go down and want to take their money out before it does.
The buyer can place a market order to purchase at the current price, or a limit order to purchase if the stock reaches a certain price (which can be lower or higher, depending on the trading strategy). That order is matched up with a seller who has put shares up for sale.