Stock Market – How Does It Work?
A stock market, equity index, or mutual fund market is a group of investors that collectively represent ownership interests in companies; these could include securities listed on a publicly traded stock exchange. It is possible for one to invest in a stock market. In order to make money from this, you must know how the stocks work, their prices, how shares are bought and sold, and what factors influence the price of stocks. You must also be knowledgeable about the risks and rewards involved in investing.
Stock markets were originally designed so that large numbers of investors could pool their money together and buy up companies as they grew, creating liquidity and value for both the company and for all of the investors. Today, there are numerous stock exchanges operating in the US, the UK, Japan, China, and many other nations throughout the world. There are several reasons why an investor would want to invest in stock markets. Some people do it to participate in the economic system, some to accumulate wealth, others to provide for future goals and others just as a way of making money.
Stocks can be bought by any individual, institution, or group of people as well as the governments of several countries. Individual investors can purchase shares from or buy bonds, which are obligation securities guaranteed by the governments of the countries issuing them. The major types of securities that are traded on the stock market include: common stocks, preferred stocks and treasury bonds. These are issued by publicly traded corporations and institutions, as well as by government agencies, banks, registered brokers, and non-regulated private firms.
Because the trading is done through the stock market exchanges, it is much easier for smaller organizations to trade. As well, these exchanges eliminate or greatly reduce the costs and risks usually associated with trading securities in the traditional manner. For example, in a large cap company, all trading and sales can be done in the over the counter markets or futures exchanges. The number of trading venues is restricted to a few major exchanges and it can take many hours to be able to access them.
On the other hand, trading on the over the counter market allows faster transactions and a much lower cost of entry than trading via the major exchanges. This type of trading also offers greater liquidity and diversity. Also, since most transactions are made electronically ( electronically, that is, without the need to visit an exchange physically), they are much more convenient and fast. Also, since prices in the over the counter market are not regulated, there is less possibility of price manipulation or other fraudulent activity.
Since trading on the stock market requires buying and selling shares of ownership in different companies, it gives the shareholder, the person actually doing the buying and selling, voting rights. It also gives the shareholder the ability to manage his or her portfolio by changing the stocks, if he or she so chooses. Shares can be sold or bought at a price determined by the shareholder. These advantages make the stock market one of the most popular investment vehicles today. Of course, many people and institutions who deal in stocks and shares also engage in Forex trading, which is basically the business side of the stock market.