How Does the Stock Market Work? Everything You Need to Know About Stock Market Exchange
A stock market is a place where money changes hands when someone buys and sells stocks. It's like buying fruits at the store, but with stocks, you're not just picking up milk and eggs - you're also getting some of the profits from that company in return for your purchase. You can buy and sell stocks anytime during the day! If you want to know more about how it all works, keep reading below.
We are certain that this blog post has been helpful in answering any questions you may have had about how the stock market works!
What is the stock market?
The stock market is an investment market where buyers and sellers meet. Buyers buy shares in companies sold by the company or other investors looking to cash out. The highest bidder gets the share at the closing price, but they pay less than what it's worth (the 'market value'). This difference between the price that you pay and the worth of the share is called 'profit.'
Share prices vary according to supply and demand. A firm that does well will see its share price increase, while a struggling one might see it drop or become worthless. The market operates on the principle that many people are willing to buy shares in great companies, but few people are looking to buy shares in failing ones. The same principle applies to commodities and derivatives and has been for some time.
How Are Stocks Traded?
Stocks are traded by the Stock Market, and each stock is a tiny percentage of ownership in a company. The Stock Market itself works like this: Every day, people go to work and do whatever they do all day (from janitor to mega-tycoon), and I'm not talking about their jobs because comics don't get into that much. At the end of their day, they send in a form telling their company how much cash they're bringing in for the day's work, and then the company does bookkeeping on it to figure out how well they did.
During this time, people are still working- either at home or wherever else you might be doing your job normally. However, if you're a mega-tycoon, your contributions to the company will probably be more important than people working normal jobs.
After a lot of this bookkeeping is done, the company sends in its earnings to the Stock Exchange for its value to be determined. The Exchange itself works by displaying how good each individual company did- a graph of the company's earnings over time will be displayed, and then people from all over the world can go to that graph and buy shares in that company. There are ten million shares total in each individual company. You start by buying one share of a 1000-share lot, which costs $10,000. Once you get more money, you can buy a smaller lot of 100 shares, which is a more manageable $100.
As more people from all over the world buy more and more shares of your company, the value will go up as demand rises. The higher the demand for that specific company's stock, the higher its price will be until it reaches an equilibrium. Then, if another company develops a new product that starts to take hold of the market, people will sell their shares in your company which will lower its price. When this happens, you can buy more shares at a lower price until it begins to rise again.
This is how investing works in reality! If you're not familiar with this, then why not start by reading this beginner's guide.
This is what you should be doing with your money instead of spending it on rent! By becoming financially independent, you can live out your dreams and do whatever you want, whether that includes traveling the world, buying new gadgets every month, or investing in stocks to grow your funds. Your possibilities are endless!
The Long-Term Benefits of Investing in Stocks
Investing in stock comes with a package of benefits that you can always enjoy as an investor. Some of such benefits include;
Allows You to Stay Ahead of Inflation- as per the history of stocks, they always have an average annualized return of 10%. This return is above the annualized inflation rate marking you safe from any inflation.
It is easy to Buy – the stock market allows you to access the company shares easily and buy them. You can do this through a broker, online, or through a financial planner. You only need to set an account and buy the stocks in a minute.
You grow Alongside the Economy- economy growth means corporate earnings growth. As the economy grows, jobs are created that translates to income generation creating sales. This also may lead to increased dividends each company gives.
Easy to Sell- if you have invested and felt like it is time for you to sell your stocks, you can do this anytime. This means you can turn your shares into cash quickly and at any time as the stock market allows you to. This is a crucial part, especially if you need urgent cash.
Transparency- the stock market is governed and regulated by a regulatory body. The regulations cannot easily change, and the stock market has to abide by the regulations that define the trading and protects you as an investor. This means that if you as an investor decide to invest in the stock market, your rights will be protected as directed by the regulatory body.
The risks of investing in stocks
It is not very difficult to find articles arguing that investing in stocks is risky. I just did a simple Google search and got over 30,400,000 results telling me the risk involved.
But what are these risks?
When people talk about stocks being risky investments, they are usually referring to two things:
1) The risk of losing the money you have invested in stocks
2) The risk of having inflation erode your investment's purchasing power
How about inflation risk? The article says this: "Many investors think of their portfolios as a savings vehicle, not an insurance policy against inflation." In other words, people tend to ignore the fact that even small inflation is a big
The Risks at a Glance
You be Paid Last- as you invest in a company, the said company may make a loss. In case this unfortunate thing happens, the company opts to pay the creditors and bondholders before they can consider you as an investor. This may delay your payment or lead to a loss if the company is declared bankrupt.
High Professional Competition- if you want to invest and wait for the dividends, you may end up suffering the competition geared by professional traders and institutional investors. This is because they have enough time to monitor the stock market, and they possess sophisticated trading tools, computer systems, and financial models that they can use to compete with you.
Risk of Losing your Entire investment- if the company you invested in performs poorly as compared to other companies, investors may sell, sending the stock price plummeting, which will see you lose all of your investment.
FAQS Associated to the Stock Market
How do I Start to Invest in Stock?
Investing in the stock market is simple and easy. You need to start by opening a brokerage account. Opening a brokerage account is simple, and you will be guided on the steps involved. After this, you only need to spend a few dollars and buy shares of a specified company.
What is Investing in the Stock Market?
Investing in the stock market simply refers to buying equity in a company or firm of your choice. You can decide to become one of the owners of such a company, and you will be paid dividends in the ratio of your invested amount.
The stock market has been in existence for a while now, and many individuals, companies, and firms have used it as an investment plan for them. You as an investor, you can also reap from making investments in the stock market too. Although the stock market comes with few risks, you can always make a living from such investments. Try the stock market today!