The Stock Market Deconstructed
Most people are not familiar with the role the stock market plays in the economy. In the same manner that they are not certain on how it exactly works. Perhaps the seeming distance is because the common person does not see any relevance of the stock market to his life.
Essentially, the stock market or sometimes called an equity market is a type of public entity used for the trading of company stocks or shares based on an agreed price. It deals with those in the securities list as well as privately traded ones.
Essentially the global stock market is made up of smaller stock exchanges for a particular country. For example, the stock market in the United States is represented by the New York Stock Exchange while in Canada it is the Toronto Stock Exchange.
In Asia, you have the Tokyo Stock Exchange and the Singapore Stock Exchange among others. Paris Bourse, London Stock Exchange, and Amsterdam Stock Exchange are some of the major markets in Europe. All of these when joined together is considered as the stock market of the world.
Defining the Stock
In order to comprehend the stock market you must have an understanding of its basic commodity which is the stock. Basically, a stock is a type of certificate which shows that the holder owns a small portion of the company.
Buying stocks means you pay for a corresponding percentage of what that company owns like computers, buildings, and chairs among others. People who own company stocks are called stockholders and are considered as partial owners.
Becoming a stockholder means that whatever profits the company makes, you earn also. The percentage of profit of course would depend on the amount of stocks that you own. The total number of stocks available for the company is commonly reflected in the stock market.
Levels of stock
When considering buying stocks from the stock market, there are four levels that you can choose from.
1. The lowest type are the penny stocks which represent small companies which are considered to remain that way for a long time and are mostly of no value.
2. The next level are growth stocks for new companies which show promise to succeed but are not always considered stable. One of the most valuable issues in the stock market is those that represent well-established businesses.
3. The Secondary stocks are for companies which are almost sure to continue strengthening and succeeding.
4. Blue chip stocks are the highest level in the stock market and represent older and very stable companies which mean that they are the safest investment of all. Essentially the stock market represents risks based on your decision on what level of stock to purchase.
Owning company stocks also means that you have a bit of say in the decision making process of the company. The more stocks you buy from the stock market the louder your voice in the company becomes.
How to profit from the stock market
Profits are what drive the stock market. Companies want to make profits and so do their stockholders. There is however some factors that needs to be considered when deciding on the level of stock to buy. Using the stock market means you must predict the potential value of a company by asking the questions:
o Has the company recently made profits?
o How popular are the products or services?
o Do the products or services answer a market demand?
o How many major competitors does the company have?
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Purpose of the stock market
Basically, the stock market is considered as one of the more important part of a country’s economy. It is expected to play a pivotal role in terms of the growth of industries as well as commerce in the country.
Because of the great extent of impact the stock market can exert on the economy, the government, central banks, and industries keep a keen eye on its activities. The stock market is important for both the investor and the company. Essentially, the stock market is also one of the best ways that a company can raise funds for expanding its operation or coping with expenses.
Funds are channeled from the stock market through the issuance of company shares of stocks. This represents a better way to raise funds compared to taking out a loan from financial institutions. This is also the reason why the stock market is the primary fund raising strategy of many companies.
Secondary stock market role
Aside from being used by companies to raise funds, the secondary role of the stock market is to provide a common platform for both sellers and buyers of stocks. The platform gives institutional investors as well as retail investors a way to deal stocks. The fund raising activities in the stock market are made possible by the buying and selling of stocks.
The stock market traders are responsible for the movements of the stocks. Brokers make it possible for investors to buy or trade stocks. These brokers are licensed to buy and sell in the stock market based on the preference of the investors. This means that basically they are responsible for ensuring the life of trading in the stock market.
Essentially, the stock market does not allow buyers and sellers to deal directly which means that stock brokers function as their middlemen. Company stock prices are determined by the current demand and supply.
So basically, as a common person, you can take advantage of the stock market to generate additional income for yourself outside of your employment. For companies, it is a creative way to get the common person involved to generate profits rather than taking out loans. This is also why the stock market is crucial in the economy of the country.