The Fundamentals of the Stock Market: How It Works

Introduction:

At first, the stock market can seem overwhelming, filled with complexity and uncertainty. that's very true.

We'll help you to understand that the industry's global capitalization was nearly $2.5trillion dollars during 1980 and now 44 years later it is approximately $123 trillion dollars.

So, there is a high chance you might participate in the market at some point in future. Understanding how it works will make it clear, less overwhelming and can give you the confidence to participate in it effectively.

What are stocks?

Let's break it down, Stocks, also known as equities, represent partial ownership of a publicly traded company. So, When you buy a stock in a company, it means you own a part of that company.

A share is a unit of stock. The more shares you buy, the more stock you have in a company.

There are two main types of stocks, one is common stock and the other is preferred stock, the difference is that common stock gives shareholders the right to vote on a company matters while preferred stock doesn't. Preferred stock has a high dividend payout.

Initial public offering (IPO):

Private companies list shares of their stock on an exchange through a process known as Initial Public Offering (IPO). Once a company is listed on an exchange now it is a public company.

Investors buy those shares, and the company raises money to grow the business.

The terms “stock market” and “stock exchange” are often used interchangeably, but in reality they are two different things.

What is a stock exchange?

A stock exchange is a specific platform, either physical or electronic, where shares of publicly traded companies are bought and sold. On exchanges Investors trade securities and companies raise capital.

Few major stock exchanges:

NYSE is an American number 1 stock exchange in the world by market capitalization exceeding $25 trillion located in the Financial District of Lower Manhattan in New York City.

NASDAQ is an American stock exchange based in New York City and ranked second by capitalization. The exchange is owned by NASDAQ, Inc.

London Stock Exchange (LSE) is a stock exchange based in London, England. There are over 1,400 companies on the LSE, which are in total worth over £3 trillion.

What is stock market:

This entire ecosystem, including trading and exchanges, along with all activities and participants involved in trading, including various stock exchanges, as a whole, is called the stock market.

The supply and demand for stocks determine the price for each security at which investors and traders are willing to buy and sell.

How does the stock market work?

There are two types of market, The primary market and the secondary market.

The primary market is where shares are created and list through initial public Offering (IPO)
The secondary market is a stock exchange where investors and traders are actively buying and selling stocks of companies everyday.

Supply and Demand:

The supply and demand determine share prices. If the demand for shares is greater than the supply from the seller, the prices go up, but if the demand is less than the supply, the prices go down. Prices of stocks are determined by the last price at which the buyer agrees to buy, and the seller agrees to sell.

The demand for company shares depends on how profitable the business is. As company earnings increase, the demand for shares increases, as a result share prices of the companies go up.

Bull and bear market:

You might be wondering, what does the stock market have to do with a bull and a bear? Well, a long time ago, these animal names were symbolically linked to market trends. When the market is in a "Bull" phase, it means investor confidence is high, demand for shares is strong, and stock prices are steadily climbing. However, if the opposite is true, demand is low and stock prices are falling it is referred to as a "Bear" market.

Market hours:

Market hours are hours in the day in which the stock market operates, these hours are defined by stock exchanges where trading occurs and vary by region and country.

The New York Stock Exchange (NYSE) and NASDAQ operate from 9:30 AM to 4:00 PM EST; the London Stock Exchange (LSE) is open from 8:00 AM to 4:30 PM GMT, Monday to Friday; and the Tokyo Stock Exchange (TSE) operates from 9:00 AM to 3:00 PM JST, Monday to Friday.

Conclusion:

By gaining a solid understanding of how the stock market operates, investors can make more informed and better decisions. While it may seem complex at first, with the right knowledge and approach, the stock market becomes a powerful tool for building wealth over time. It's essential to understand the basics and fundamentals. We will provide valuable insights and helpful guidance to our readers, and we’ll continue to share knowledge to support your journey. Thanks for reading.