For a novice investor or trader, the stock market might appear like a gambling den. If you win, you can buy new shirts. If you lose, you might lose all your shirts.
Well, that is not the best analogy. The point still stands, however, as gambling in trading stocks and investing in a stock market is highly parlous. Hence, in avoiding the ‘Russian roulette’, it is best to understand what stocks and stock market are and how they work.
In short, a stock is a share of ownership of a publicly-traded company traded on a stock exchange. Stocks come in all sizes as you can invest in large, globally well-known, companies or smaller, potentially prospective, companies.
Buying a stock indicates that you own a percentage of the company and, in the future, your ownership will eventually turn into profits. Through an effortless single tap and a particular sum of cash, you can acquire stocks. However, a thorough analysis and calculation on the stock market determines your success.
Meanwhile, a stock market is a publicly open trading venue in which people buy and sell, in other words, trade, stocks. A stock market has no physical form, thus trading in the venue, in this era, can be administered through telephones, emails, or even your smartphones.
As there are nearly limitless stocks out there, there also also numerous stock markets. That said, it is better to know how to ‘read’ stocks in those stock markets.
Also Read: Successful Traders vs Failing Traders
How a Stock Market Works
Due to the existence of nearly uncountable stocks, a stock market cannot precisely detect every single one of them in details. Thus, stock markets display indexes of the stocks. The indexes are the indicator to track the performance of certain groups of stocks at that very minute.
There is also a term ‘stock price’. Stock price refers to the absolute measure of a company’s worth. Ideally, the goal of investors or traders is to buy low and sell high. In so doing, it is unwise to trade often as you have to calculatedly wait for the right ‘low and high moment’.
Moreover, the indexes also indicate what others will pay to buy a stock at a specific time. Ergo, they give framework to ascertain the worth, value, and demand of particular stocks
Stock markets also display an actual supply and demand. For every stock transaction, if the buyers of a certain stock outnumber the sellers, the stock price will escalate, and vice versa.
Also, stock markets work like an auction. A transaction takes place either when a buyer accepts the ask price or a seller takes the bid price. If buyers outnumber sellers, the bid will raise in order to obtain the stocks. Simultaneously, sellers will elevate the price.
Also Read: 3 Things to Avoid When Investing in Stocks
