A Beginner’s Guide to the Stock Market and How it Works

A Beginner’s Guide to the Stock Market and How it Works

If you are intimidated by the thought of putting any of your
money in the stock market, you are not the only one. People with not enough
knowledge about the stock market are either scared by the horrific incidents
they get to hear from people about losing almost half of their portfolio value,
or they are misled into believing tips by “stock market experts” that come with
the promise of enormous returns but typically never pay off, sending the individual
back to square one with bankruptcy as a parting gift. Needless to say, it is
dire to be vigilant when you are in the stock market.

So, considering all these risks, should an average
individual consider investing in the stock market? Well, yes. Stock market does
have its potential pitfalls but when it is dealt with mindfully after educating
yourself, it is one of the most profitable markets and perhaps the best way to
build up your income. Although the major portion that contributes to the net
worth of an individual is his house, most of the well-reputed and wealthy
people have their money in the form of stocks. In order for you to better grasp
the concept of the stock market better, lets delve into what it is.

What is a stock exchange?

For a stock exchange to work, the key element is stock. Stock exchanges are referred to as secondary markets where organization owners can issue their shares and meet potential buyers for those shares. Additionally, any person having shares can trade them off in a stock exchange. Note that the companies that issue their shares or are listed on stock markets are not responsible for the day to day purchasing and selling of their own shares. So, it is important to keep in mind that when you are purchasing a share of stock, the company isn’t selling it to you directly but an existing shareholder is. Similarly, when you sell those shares, you are not selling it back to the company but to a person looking to invest in that company.

How share prices are set?

There is a slew of ways through which the price of a share
can be determined but typically it is done through an auction process. Buyers
and sellers bid and offer the prices for which they want to purchase or sell
shares. Bid determines the price at which an investor wants to buy and offer is
the price on which the shareholder wants to sell. When the bid and the offer
price concur, a trade occurs.

In general, the stock market comprises of tons and tons of investors and traders. These traders and investors have a perception of what the price of a stock should be and they turn their perception into action when they buy or sell. This creates minute-by-minute gyrations which means that the price is swayed throughout the day. A stock market is basically a place where this type of trading can take place and this is made possible by exposing buyers and sellers to each other. For a potential investor in the stock market who is just getting started, it’d take a stockbroker to get access to such a market. This stockbroker would be the intermediary between the buyer and the seller. You can either get in touch with a stock broker or get the best stock trading software out there to streamline your operations.

Stock Market Supply and Demand

For anyone interested in witnessing the laws of supply and
demand in real time, a peep at the stock market is what it would take. Each
transaction of a stock requires a buyer and a seller. And since the textbook
laws of supply and demand are present in the stock market, if the buyers are in
surplus of the seller the price of the stock will shoot up. In contrast, if
there are more sellers than buyers then the price of the stock will go down.

The difference between the bid and ask price, also known as
the bid-offer spread shows the difference between the highest price that a
buyer wants to pay with the lowest price the seller wants to sell the stock
for. The trade takes place only when the buyer agrees to the ask price or the
seller accepts the bid price. In an instance in which buyers exceed sellers,
buyers could become inclined to increase their bid price. However, conversely,
if the sellers are in surplus then they would have to decrease their ask price
because buyers will typically select a lower ask price.

Matching buyers and sellers

Typically, stock markets depend on professional traders to
continuously make bids and offers during a trading day because it not always
happens that a potential buyer and a seller always meet up. Such professional
traders are also known as specialists or market makers. A stock market is a two-sided
market which means that it comprises of a buyer and a seller. The bid and the ask
price of the buyer and the seller have essentially a bridge between them, which
is known as the spread. The narrower the spread gets the more bids and offers
take place, adding to the liquidity of the stock. Additionally, if buyers and
sellers exist at higher and lower prices in surplus then the market is known to
have a good depth. Good quality stock markets typically have small bid-ask
spreads, great quality, and depth. Similarly, individual stocks of high quality,
big companies also have the same qualities.

Final Words:

Even though, the prospect of being a new entrant in any sort
of market, be it the forex market or the stock market can be anxiety inducing,
approaching it with discipline can lead to successes. People that have made
millions and billions by trading in the stock market have done it primarily by
educating themselves, before they took any risky moves. A good move for a
novice in the stock market would be to start off by getting the best stock
trading software, so that he lands almost always on the right side of the
movements in the market.

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