How Does The Stock Market Work For Beginners

How Does The Stock Market Work For Beginners
How Does The Stock Market Work For Beginners. Image source: Pixabay

When we think about preparing our financial future, the majority of us are faced with the problem of trying to understand the way the stock market works as a beginner. Knowing what are good stocks to buy and when to make a purchase are things the majority of us struggle to understand without the help of professional traders. Many long-term investors make this their major profession with a goal of pushing themselves to understand the markets through vast amounts of research. Taking those first few steps into the markets is an easy thing to do when you have the necessary information at your fingertips.

What Are The Markets?

One of the major problems most of us face is understanding exactly what is meant by the term stock market. There is no individual stock market to trade on but a series of exchanges are available to link buyers and sellers of stocks and shares. The most famous of these is probably the New York Stock Exchange that is home to some of the world’s largest companies. There are a series of exchanges available in the U.S. and around the world that specialize in different areas of the markets, with the S&P 500 and NASDAQ saw as providing an insight into the health of the markets as a whole.

What Is Meant By A Stock Or Share?

Now we understand the stock market is made up of a number of different exchanges you need to learn about the different types of stocks and shares. In essence, a share is simply a different way of discussing a share that represents a small piece of the equity held by a company traded on an exchange. When you purchase a share you are obtaining a small interest in the assets owned by a company and the profits they have already made and will make in the future. Shares are often issues in huge numbers with the largest companies trading millions and billions of shares in their company at a time.

There are two different forms of stocks on offer through a stock exchange, preferred and common shares. These two forms of stocks provide a certain amount of equity in a company and offer different rights to the buyer. Firstly, common shares do offer the owner the right to a share of any dividends paid by the business after a specific amount of time. The common share will also offer an individual the chance to vote at the annual general meetings of the company.

A preferred share is a different way of purchasing equity in any company with the business offering a share in its business without the right to vote. Preferred shares are much more sought after than common shares as these guarantee the holder a dividend payment at regular times throughout the year.

Why Are Shares Being Offered?

We talk a lot about the shares in any business being offered on the stock exchange but have you ever questioned why the shares are being offered to buyers. Most startups and existing companies are looking to generate funding for their future or to pay off current debts when they decide to push forward with a share offering. Companies starting up in the 21st-century are often basing their value on the possible sales of technology, such as the success seen by Facebook despite it having few assets when it was first floated on the stock market.

Offering shares to the public is a preferable option to debt financing that sees shares in a business offered in return for loans designed to help a business get off the ground. Debt financing is usually undertaken with a financial institution and sees often crippling interest rates offered on a loan for a startup. Equity financing is the offering of shares in return for funding as part of an Initial Public Offering, IPO, designed to create a listing on a specific stock exchange. By listing a company with an exchange, the first step is being taken to taking a company from private ownership to public with people around the world owning shares.

Understanding The Price Of Shares

When you turn on the TV and watch a business news channel you will be hit a series of letters and numbers moving across the screen. Each company that is listed on a stock market is given an abbreviated series of letters based on their name with the numbers beside them showing the share price in real-time. The price of each stock or share is set when a buyer makes an offer for a share and the owner makes a bid of the price they are willing to sell for. An agreement will eventually be made between the buyer and seller the price is set that is then reported by business channels and other media across the world.

For those who are hoping to study the stock market on a regular basis, it is important to understand the theory of supply and demand that can be seen throughout the markets. The price of a stock will rise when there are more buyers looking to purchase a share than there are sellers who are willing to let their assets be sold. In contrast, the price of a stock will fall when the number of sellers outweighs the number of buyers and the price of a stock tumbles because of this. Prices of a stock can fall significantly when the company has some form of bad news surrounding its workings or they are facing a sharp fall in profits to dent the confidence of shareholders.

Working With A Stockbroker

If you are looking to buy stock in a company you will need to purchase stocks but you must hold a license to trade on a stock exchange. A licensed stockbroker must be used when you are looking to buy or sell a stock with many now offering their services online to make these trades as simple as possible. Trades can be completed using a single trade price or you can pay monthly for a specific number of trades.

A stockbroker is a middleman handling the joining of a buyer with a seller of a specific stock and agreeing on a price for the sale. When you work with a stockbroker you purchase your shares and then make your payment to the stockbroker in return for their services. Many stockbrokers will offer advice on good stocks to buy when you call and open your account.

Understanding Different Types Of Markets

We have all heard the terms bear market and bull market, but what do these terms actually mean? We are currently in a bull market and have been for the longest time on record since 2009. A bull market basically means the exchange is rising in value for a prolonged period of time and is making a profit for the majority of shareholders. In contrast, the bear market is one where the value of the overall exchange is falling by around 20 percent or more. A bear market is a scary proposition for most investors but you should bear in mind the bear market tends to be a shorter period of time and generally does not last for long at all. Adversely, the bull market can last for years at a time with the current bull market lasting more than a decade following the great crash of 2008 and 2009.