Understanding how the stock market works is key to getting past any fear or anxiety associated with the share market.
We have all heard the stories surrounding the stock market and some are enough to scare most of us away. But the reality is somewhat different.
Sure there are plenty of stories about investors making massive amounts of money and probably an equal amount of stories about people going broke. But the stock market is an effective platform to raise capital and encourage economic growth.
The stock market is essentially an avenue for companies to raise capital through investment. A stock represents ownership of interest in a company and as a result, stockholders can also receive equity in a company just by owning a piece of it.
For example, if a company wants to update its facilities and expand operations, they can raise the required capital by selling shares of their common stock.
A typical company can issue millions of shares, so the typical stockholder will only own a tiny fraction of it.
People buy stocks for the following reasons:
Some investors like to buy shares at a low price and sell it when the share price goes up. Others are happy to receive quarterly dividend payments.
To really understand how the stock market works, you have to first understand how shares are priced and traded.
Like everything in the commercial world, stock prices are based on supply and demand.
The price isn’t controlled by the issuing company and it isn’t set by the stock exchange. The price is actually decided by the investors who decide what it’s worth to them.
Investor perceptions are formed by the following:
It basically comes down to anything that can impact the public’s confidence in the company and the nation’s economic future.
As investor perceptions are always changing, the result is the rise or fall of stock prices. As a result, you can say that the way the stock market works is basically the way any business works. It just comes down to supply and demand.
Having knowledge about how the stock market works isn’t enough for novice traders to trade successfully. You also have to understand the risk that you will be exposed to.
There are a number of factors that can affect the end result, so the risk will always be there regardless of how good things are at the moment.
Factors that can create risk are the following:
So before you start buying stocks, make sure that you do an assessment of your own tolerance for risk.
Whether you’re trading in equities or foreign currencies, potential gains and risk go hand in hand. So it’s always a good idea to make informed “cautious” decision.