What is a Stock Market?
Shares of all publicly traded companies are listed on the stock market. The stock market is the exchange where you can buy or sell over-the-counter (OTC) shares.
Of course, there are various centralised exchanges where these trades are possible. The stock market is also known as the equities market. It is the de facto exchange venue for free-market economies.
Companies that are listed on stock exchanges are cleared by the authorities to access capital in these exchanges by offering shares to individuals and companies in a public, licensed, and regulated exchange. Shares are equivalent to ownership of a company.
The equity markets, a.k.a. the stock market, offers plenty of opportunities to investors and to boost their income without starting their own enterprises. New businesses and ventures are associated with high start-up costs and overheads. From a company perspective, stocks are an easy way to significantly increase capital holdings. When a person buys shares of a company, it increases the company’s worth. When investors plough money into the stock markets, it can result in a mutually beneficial paradigm for both the investor and the company.
A caveat is in order: Stock market investing is not without its risks. There is always the chance that a company will mismanage funds, make risky investments, or may not prosper in competitive economy. Traders and investors can lose money just as easily as they can make money on the stock market. For example, if the stocks you are holding from a company fall in value, the value of your stocks will be less. If a trader or an investor sells stock holdings for less than he/she paid for them, that trader will incur losses.
Components of the Stock Market
The stock market is comprised of multiple segments. Each of these should be carefully evaluated before you purchase shares in any publicly traded company.
The stock market is divided up into 2 sectors – the primary market and the secondary market. We will briefly explore each of these below:
The Primary Market for Securities
When securities (stocks/shares) are created, this is where it happens. This is an open stock market where publicly traded companies will offer their shares and sell them for the first time. They are offered directly from the company that issues the shares. When the shares are offered directly from the primary listed company, it increases the credibility of the shares being offered. Investors have a greater propensity to buy the shares in that company. Many of the bigger investment institutions such as hedge funds, merchant banks, investment banks, and other corporate entities dominate the primary market.
Secondary Market for Securities
The secondary market is the place where traders and investors participate in stocks trading on their own. There is no involvement/participation by the original company that issued the stocks. Most stock markets operate in this fashion. The primary market serves as the point of call for share offerings, but trading activity typically takes place on the secondary market.
What is Over The Counter Market
The over-the-counter(OTC) market is a venue where investors and traders can buy/sell stock from decentralized markets. The concept of a decentralized market is a reference to buying/selling of securities between two parties in a transaction.
These typically encompass the brokerage and the trader. Most of these trades are conducted telepathically or electronically. Options include the MetaTrader 5 OR MetaTrader 4 trading platform. These transactions do not take place through the local stock markets. The over-the-counter market is typically limited to stocks trading with stock prices that aren’t at the stock exchanges.
How The Stock Exchange Function
Traders and stock brokers use the stock exchange to conduct transactions in securities, shares/ stocks, and Bonds . A stock exchange goes by another name – a bourse – such as the FTSE 100 index, the Dow Jones, the NASDAQ, the CAC 40, the DAX 30 etc. These exchanges provide options for the issue/redemption of various financial instruments. They also include income payments and dividend payments. Various other assets are listed on the stock exchanges, including pooled investment products such as mutual funds, bonds, unity trusts, and derivatives trading instruments.
The Primary Stock Market
Most publicly traded companies use their local stock exchange such as the FTSE 100 or the FTSE 250 index as their platform to list their company. This is where capital gains are derived.
How to Invest in company stocks
It is possible to use an institutional brokerage and go the conventional route when investing in stocks. However, there are various alternatives that traders and investors can use to play the stock market. AvaTrade UK website offers derivatives trading on stocks as an alternative to, or a hedge against traditional stock market investing.
What Is Value Investing
Value investing is deemed an investment strategy whereby various stocks are currently trading at less than what they are worth. They are considered a value investment, because there is an inherent value in them. Investors who pursue this type of strategy are known as value investors.
They constantly scour the markets in search of stocks that are worth more than their current listed price. They are otherwise known as undervalued stocks. In the future, they are deemed to generate increased returns. Investing in this way doesn’t require a financial background, but an understanding of basic trading and finance is certainly a benefit.
What is Price-Earnings Ratio
As a UK trader, you have probably seen the term P/E listed on your stock profile. It stands for price/earnings ratio. It is a measurement of the company’s share price in relation to its per-share earnings. For example, if the share price is £20, and the earnings are £2, the P/E ratio is 10. This simple calculation is derived by dividing the stock price by EPS (earnings per share) to get its market value per share. The price/earnings ratio is a £ amount that a trader or investor can realistically expect to invest in a company to receive the equivalent £1 of that company’s earnings.
What is Dividend paying stock
Companies typically reward shareholders (investors) with payments known as dividends. If you own a stock, and the company generates profits, it disburses a portion of profits to shareholders in the form of dividends. Dividends are usually paid per quarter, and they can serve as a steady income stream for investors. Dividend paying stocks also serve as an enticement to buy more stocks.
Be advised that dividend paying stocks are deemed long-term investments. There are typically associated with lower risk levels, given that these companies are more stable. Dividends are likely to rise over time, and companies that make dividend payments on stocks are committed to rewarding their investors.
What is Swing Trading
Short-term trading on options and stocks often takes the form of swing trading. Swing trading typically lasts less than a day, by traders can hold their positions for up to 2 weeks at a time. The purpose of swing trading is to spot trends in the market, and then swing into action to maximize gains while the markets are trending bullish or bearish. Swing traders typically use technical analysis to spot changes in market activity as they happen.
What is Day Trading
When a trader speculates on buying or selling currency pairs, commodities, indices, or shares, with the intent to complete the trade within the day, it is considered day trading. Traits can be opened at any time during the day, such as the moment markets open or just before they close. Provided the trade is concluded within the same day, it is known as day trading. UK traders should be advised that day trading can be profitable, or costly, depending on the volatility of the type of underlying financial instruments that are being traded. These trades are entered into with the intends to close out the trades within the same day. They are short-term trading options.