What is the ‘Stock Market’?
A stock market is a place where the shares of companies that are publicly owned can be bought and sold either OTC (Over-The-Counter) or through centralised exchanges. The equity market, as it is also known, has established itself as a free-market economy, in that it offers companies the ability to access capital in exchange for offering interested outside parties a portion in the ownership of the company.
The stock market or equity market offers the opportunity for investors to increase their income without the high risk of entering into their own businesses with high overheads and startup costs. On the other hand, selling of stocks did help the companies themselves expand exponentially. When you purchase a company’s shares, it is generally associated with the increase in the company’s worth. Therefore, trading on the stock or equity markets can be a win-win for both investor and owner.
There is a negative risk, however small or large, depending on the amount of stock bought, that you could lose money in a trading environment. If the stocks a trader holds lose value, then so does the trader. If he decides to sell his stocks when the value is lower, he will sell at a loss.Join the Stock Market with AvaTrade to enjoy the benefits of a globally regulated broker.
How is the Stock Market Broken Down?
There are various segments of the stock market to consider when entering into a purchase or interest in the shares of a particular public company.
The stock market is divided into the primary market and the secondary market.
The market is where securities are initially created. This is an open stock market where a company’s shares are offered and sold for the first time and directly from the company issuing them. The two sides of the trade here are the company issuing stocks and the buyer. Being listed on the primary market lends credibility to a company not previously listed on an exchange. It can also raise funds for companies wishing to reinvest in expansion or needing to for their longer term plans. They do this through IPO (Initial Public Offer) or FPO (Further Public Offer). The primary market is dominated on the buy side by larger investment institutions such as investment banks and hedge funds.
In the secondary market, investors trade these stocks themselves, and the company that had previously sold the stock initially is no longer a direct participant in the transaction.
The OTC market, also known in trading as the off-exchange, is an option for investors to take part in the purchasing and selling of stock from a decentralized market. Decentralized is where a transaction of buying or selling will take place between two parties, such as the trader and the broker. Transactions are generally done electronically either telephonically, through e-mail or via a trading platform, usually with an online broker and not through the local stock exchange. The OTC market is usually for stocks and stock prices not commonly listed on the stock exchange.
The Stock Exchange
This is traditionally the base where stocks or shares, bonds and other securities are exchanged between a stockbroker and a trader. The stock exchange, also known as the bourse, can provide facilities for the issue and redemption of financial instruments with the inclusion of the payment of income and dividends. Other assets listed on the stock exchange can include derivatives, unity trusts, bonds and pooled investment products, like exchange-traded Funds and stock market indices.
The main Stock Exchanges
Most public companies make use of their local stock exchanges as a platform to publicly list their company for capital gains. The following list is a select few that are also offered by AvaTrade, stated with the region you can find them in. These are national exchanges that act as the secondary markets.
|Local Stock Exchange||Region||Public Listing|
|New York Stock Exchange||New York, United States of America|
|NASDAQ||New York, United States of America|
|London Stock Exchange||London, England||
|Borsa Italiana||Milan, Italy||
|Japan Exchange Group||Tokyo, Japan|
|Hong Kong||Central, Hong Kong|
|Frankfurt Exchange||Frankfurt, Hesse, Germany|
|Shanghai stock exchange||Shanghai, China||
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Investing in stocks
There are a number of factors to consider when buying stocks or even trading them as CFDs. Let’s looks at them.
This is where you look to identify undervalued stocks. Value investors actively seek out undervalued stocks as they believe they will see major returns on these listings. This type of investing does not require you to have a background in finance; however, an understanding of trading and basic finance knowledge is recommended when entering into any trading or purchasing of stocks.
Rather than investing in undervalued stocks; this is where you invest in more valuable stocks that bring consistent profits in the form of growth and dividends. In this case, stock price gains are slower and steadier.
P/E Ratio, as it is better known, is defined as a company’s measure on its current share price relative to its per-share earnings. This is how they calculate the price-earnings ratio:
By taking the stock price of the company and dividing it by is earnings per share (EPS) = market value per share. The P/E ratio is a dollar amount that a trader can expect to invest in a company in order to receive one dollar of that company’s earnings.
Dividends are a way that companies reward shareholders for owning a stock in their company. Dividends are generally paid in cash on a quarterly basis and can become a steady payment if the company is earning. Dividends come from earnings profits, and this is a strategy taken by some companies, rather than reinvesting all the profits back into the company.
This is a longer-term investment with a lower risk, as these companies are generally more financially stable and overtime dividends rise, and they are committed to dividend payments on their companies’ stocks.
Swing trading has become a very popular way to trade in the short-term when trading on stocks and options. Generally swing trader’s positions last less than a day but can last up to two weeks. When swing trading, the goal is to identify the overall trend and ‘swing in’ and capture the gains while the market is on a trend. The use of technical analysis is aadvantageous when swing trading, to monitor quick market changes as and when they happen.
Speculating or buying or selling shares, commodities, indices or currencies strictly on the same day. Positions can be opened the second the markets open, and throughout the day; however, all positions must be closed before the market closes for that trading day. Traders that use this trading strategy are known as day traders.
Depending on the type of trader you are whether it be longer or shorter-term, trading conducted in the short-term usually has more profit associated with this as well as a higher risk of loss potential. It is fast, and trades are entered into and exited in a short period of time.
Trading Stocks CFDs with AvaTrade
Trading stocks CFDs is made simple with AvaTrade, not only do you have access to over 1000 stocks, we offer all our traders up to leveraged trading. You will benefit from our outstanding support in your language, as well as the peace of mind knowing that you will be trading on a secure trading platform and that all trader funds are held in segregated accounts in international banks.
Stock Market Main FAQs
What is stock market volatility?
All investing forms come with risks. One of the risks in the stock market is that prices will move against your position, causing a loss rather than a profit. This risk is magnified by volatility in the stock market, which is the wild swings often seen, particularly in individual stock prices following news or earnings. Over time volatility evens out and so the key to defeating volatility is to remain in the market for a long period of time and ride out the ups and downs.
Where is the stock market located?
Different markets are located in different places, and in some instances, there is no physical location for the market or index. For example, the NYSE is physically located in New York City at 11 Wall Street, and you can actually go there and see the floor traders. By contrast, the Nasdaq is fully electronic, and while it has its headquarters in New York City, there is no trading floor where you can go to see the open outcry form of trading. Nearly every country in the world has one or more stock markets, and most have physical locations but have been increasingly migrating towards electronic trade.
How are prices set at the stock market?
Most stock markets work through an auction process, with buyers placing bids for the price they are willing to pay for a stock, and sellers setting an ask price for how much they are willing to sell for. When the two prices meet, a trade is conducted, and shares can exchange hands. In the past all of these trades were made on stock market floors or pits, using an open outcry system where the market makers would yell, or cry out the prices at which shares could be bought or sold. That has evolved into an electronic auction system, which is good since stock markets today consist of millions of individuals, all of whom have their own ideas of what a stock is worth.
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