The stock market is a term given to a number of markets. Here, buying, selling, and issuance of stocks take place. These occur via the over-the-counter or the stock exchange. The stocks, mostly shares of publicly-held business organizations, are traded to gain ownership and obtain profits. An effective stock market is crucial to the economic development of a country. It offers the companies the opportunity to gain quick capital. Moreover, it also allows investors to generate wealth in the long term.
Function of the stock market
There are two main purposes of the stock market. The foremost is to enable companies to raise capital for expansion of the business. For example – a business organization issues the buying and selling of one million of its shares. Now, the price for each share is set at $10. When one million shares are purchased by investors, then the company earns $10 million.
However, the firm also has to pay specific fees to the investment bank that handles the stock trading. Now, the company can use this capital for its growth. It is definitely better than taking a loan as there is no issue of incurring debts or paying the interests on the money borrowed.
The second function of the stock market is that it offers the investors the opportunity to gain profits over a long period of time. It is the ideal way to increase your net worth. There are two distinct ways that you can make a profit from a particular stock. Firstly, you can gain regular dividends. Another way is if you sell the stock when its price increases.
For example – if you have purchased the share at $10 and then the value of the share increases to $20. Then, you can sell it to make a massive amount of profit.
How stock trading takes place?
Before you understand stock trading, it is vital to know that there are mainly two types of stocks. These include OTC stocks (over-the-counter) and exchange-traded stocks.
There are numerous stock exchanges that form a particular stock market. For example, the U.S. stock market has multiple stock exchanges such as NASDAQ, New York Stock Exchange (NYSE), etc. These stock exchanges help in the purchasing and selling of stocks amongst potential investors. However, there are various directions that must be followed. Government agencies ensure the regulation of the stock exchanges to prevent financial fraud. They also ensure that the market functions efficiently without causing any disruption.
Now, when it comes to OTC stocks, things are a little different. Here, you can buy and sell stocks with the assistance of a market maker. These are basically dealers that handle the specific OTC stocks. For more information visit cfd trading uk
Are you wondering what OTC stocks are? These stocks are those that do not meet the requirements required for being listed on the stock exchanges. The most unfortunate drawback is that regulations are not the same for these stocks. It makes gaining information on them difficult. As such, the level of risk increases substantially.
Different participants involved in the stock market
There are numerous players that help in the effective functioning of the stock market. Aside from the investors and traders, there are many more participants. While it is true that they have a specific role, they are also intricately intertwined with the function of others.
These are professionals that have the license that gives them the authority to purchase and sell different types of securities. They do so on behalf of business organizations or individual investors. The stockbrokers basically act as middlemen that connect the investors with the stock exchanges.
When a business organization decides to offer its shares to the public, the first step they take is to opt for the service of an investment bank. It is the investment bank that researches the revenue of the company and the current market conditions to set up the initial price value. Then, the shares are offered to the public.
In return, these banks levy a certain amount of fee, and the company gets the capital it needs for expansion. Thus, it is the duty of the investment bank to ensure that all the shares are sold and that too at the highest bid possible.
Research analysts are often employed by mutual fund firms, investment banks, stock brokerage companies, etc. They conduct the necessary research and formulate a report.
It details the estimate of the stock price for an IPO offering company. They can also predict the highs and lows of a particular stock. This, in return, offers the stockbrokers and the investment bankers the opportunity to make critical decisions.
These are stock market professionals that deal with the portfolios of their clients. Now, the client can range from individual investors to a large corporation. They deal with the buying and selling of securities that make up the portfolio. Usually, they take in the recommendations from the research analysts and make trading decisions. Often, hedge funds, mutual fund firms employ portfolio managers to set up the most effective investment strategies.
These are basically brokers that handle the trading by posting ask and bid price quotes for a particular stock. They also maintain the inventory and ensure liquidity for a specific share of shares.
Knowing the different terminologies associated with the stock market
There are innumerous jargons that are involved with the stock market. For instance, the bull, the bear, market cap, debt to equity ratio, profit margin, current ratio, Price to Earnings ratio, and much more.
If you want to be successful in trading stocks, you must first understand the market explicitly.
There are multiple ways that you can make a profit from stock investment. However, for that, intimate knowledge of the market is absolutely essential. If you are keen to grow long-term net worth, you must understand the risks and then generate an effective trading strategy. Also, make sure that you develop a diversified portfolio. It will aid you in providing massive profits while minimizing the potential for risks.
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