Stock markets are essential to the success and growth of any public company. First established with an Amsterdam market that only featured shares of the Dutch East India Company, they have grown to be immense financial playgrounds in many countries through which hopefuls trade and companies soar.
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From the outside, however, stock markets look less like playgrounds and more like minefields. Filled with strange dialogue and confusion over when to trade, they seem daunting to anyone not already wise to them. However, this doesn’t need to be the case, as understanding the stock market and how it works is relatively simple.
If you want to find out what makes a stock market tick, this beginner’s guide to stock markets and their inner workings is a great place to start.
Terminology
One of the first and most important things about learning how a stock market operates is understanding the vocabulary used when trading. The stock market is home to various unique terms that could easily make you feel lost if you don’t have a firm grasp of them. The most common and important of these include:
- Ask: The lowest amount a company or seller will accept from an investor for a particular stock.
- Bid: The highest amount that an investor or buyer is willing to pay for a particular stock.
- Blue Chip Stock: Shares offered by an established brand or company rather than an IPO or small entity.
- Bull Market: A time when the market is filled with rising prices and there is optimism that things will continue going well.
- Bear Market: The opposite of a bull market and a time when things are looking bad and prices are dropping.
- Index: A group of company shares all representing the same industry or sector and bundled together for reporting or analytic purposes.
- IPO (Initial Public Offering): This is the process by which a private company begins to offer public shares and list with a stock market for the first time.
- Market Cap: The total value of any outstanding company shares.
- Price-to-Earning Ratio: Also known as the P/E Ratio, this is the calculation used to value a company by dividing the current stock price by each share’s earnings.
- Outstanding Share: A share issued and sold by a company that is still held by the investor and is, therefore, not technically held by the company.
- Ticker Symbol: The unique identifier given to a company that helps to identify that company’s stock on the exchange.
- Treasury Share: Sometimes referred to as treasury stock, this is shares that a company has retained or repurchased from investors, reducing the number of outstanding shares available in the process.
- Volume: The shares bought or sold during a specific period.
- Volatility: The degree or intensity with which a share price rises or falls.
Large Exchanges
Aside from knowing how to understand specific terms used on the stock market (or stock exchange as it is called in some regions), it is essential to know what the world’s biggest and most commonly used markets are.
New York Stock Exchange (NYSE)
Founded in 1792, the New York Stock Exchange was established through the signing of the Buttonwood Agreement, which was drafted after stockbrokers and merchants in the city came to an agreement. The exchange has grown to become the largest in the world by market capitalisation and is known for its chaotic yet efficient trading floor.
National Association of Securities Dealers Automated Quotations (NASDAQ)
Also based in New York City but founded a year earlier than the NYSE, NASDAQ was founded in 1971 by a group of security (stock) dealers that wanted to automate certain transactions to boost efficiency. The NASDAQ has since become the common exchange for large tech companies and is one of the biggest markets in the world.
Japan Exchange Group (JPX)
The Japan Exchange Group (more commonly known as the Tokyo Stock Exchange) is the largest exchange in Asia based on market capitalisation. It was founded in 2013 after merging the existing Tokyo Stock Exchange and Osaka Securities Exchange.
London Stock Exchange (LSE)
Although the London Stock Exchange was formally founded in 1801, it dates back to the 17th century, with some trades dating back to 1698. The exchange is one of the most important in the world and is home to the FTSE 100 index.
How the Stock Market Works
In essence, a stock market is a store that sells ownership in various companies. Ownership (represented by stocks or shares) can be bought or sold at any time, and you can either gain or lose money depending on how much you paid for the stocks versus how much you sold them for.
Because of this fluctuation in price, it is crucial to understand the risks of buying and selling stocks, which in some ways is similar to gambling online with a live dealer at casinos.com. As such, there are specific steps to take before starting to trade on the market:
- Educate Yourself: There are countless types of online training available that can help you better understand buying and selling stocks. Researching companies you’re interested in is essential as it may teach you something that a stock graph won’t.
- Set Limits and Start Small: When starting to trade, set a firm limit on how much you will spend on buying stocks. This limit should be relatively small but enough to get you on your way.
- Stay Informed: Once you’ve purchased stocks, keep up to date with news about the companies you’ve invested in. If all the companies are in the same sector, it would be best to sell some stocks and diversify. Should you see news of upcoming trouble, sell before you lose too much, but seek professional advice from a broker if you’re unsure.
The stock market is slightly more complex on a company’s side, but there is a common pattern or route to market that is followed.
- Companies Go Public: The first step to becoming traded for a company is to go public. This is commonly done through an IPO that (hopefully) attracts a degree of fanfare and attention. However, getting to this stage isn’t as simple as merely deciding to go public, as companies need to meet many requirements before they are allowed to list on an exchange.
- Issue of Stock: During an IPO, a company issues a set number of shares or stocks available for purchase, which sets the level of outstanding/treasury shares available on the market.
- Trading and Pricing: Once stocks are issued, trading officially begins, and the market sets the pricing within a short period. As the pricing is determined by supply and demand, more people looking to buy a stock make it more valuable and push its price up. Inversely, if fewer people want to buy the stock, the price drops.
- Trading Continues: After an IPO has been completed, trading of outstanding stock continues as investors choose to buy or sell their shares. Should the company look to raise more funds, it can issue more stock into the market.
