Stock Market – How Does the Stock Market Work | Stock Exchange

What’s about the Stock Market? If the thought of investing in the stock market scares you, you are not alone. Individuals with very limited experience in stock investing are either terrified by horror stories of the average investor losing 50% of their portfolio value.

Stock Market - How Does the Stock Market Work | Stock Exchange

For instance, in the two bear markets that have already occurred in this millennium. Or are beguiled by “hot tips” that bear the promise of huge rewards but seldom pay off. It is not surprising, then, that the pendulum of investment sentiment is said to swing between fear and greed.

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Stock Market

The reality is that investing in the stock market carries risk. But when approached in a disciplined manner, it is one of the most efficient ways to build up one’s net worth. While the value of one’s home typically accounts for most of the net worth of the average individual, most of the affluent and very rich generally have the majority of their wealth invested in stocks.

In order to understand the mechanics of the stock market, let’s begin by delving into the definition of a stock and its different types.

What is Stock?

Stock exchanges are secondary markets, where existing owners of shares can transact with potential buyers. It is important to understand that the corporations listed on stock markets do not buy and sell their own shares on a regular basis. (Companies may engage in stock buybacks or issue new shares. But these are not day-to-day operations and often occur outside of the framework of an exchange).

So when you buy a share of stock on the stock market, you are not buying it from the company, you are buying it from some other existing shareholder. Likewise, when you sell your shares, you do not sell them back to the company. Rather you sell them to some other investor.

Stock Exchange

Also known as the bourse, the stock exchange is a place where securities, such as stocks are bought and sold. It is also a place that provides facilities for issuing and redeeming financial instruments, including income and dividend payments.

In addition to stocks, stock exchanges list other assets, such as bonds, unit trusts, derivatives. As well as pooled investment products such as exchange-traded funds and stock market indices.

What Is Stock Market Volatility

All investing forms come with risks. Volatility is one of the risks of trading stocks. It is characterized by choppy price swings. And can particularly be witnessed in individual stocks during news or events such as an earnings release.

Volatility can increase the risk of losses but it typically evens out over time. This means that a cure for volatility is to hold stocks over a longer period. And to ride both the ups and downs in the market.

Benefits of Stock Exchange Listing

Below are some of the benefits of stock listing;

  • An exchange listing means ready liquidity for shares held by the company’s shareholders.
  • It enables the company to raise additional funds by issuing more shares.
  • Having publicly traded shares makes it easier to set up stock options plans that are necessary to attract talented employees.
  • Listed companies have greater visibility in the marketplace; analyst coverage and demand from institutional investors can drive up the share price.
  • Listed shares can be used as currency by the company to make acquisitions in which part or all of the consideration is paid in stock.

Although there are risks involved in stock, but with these benefits you can always try.

Problems of Stock Exchange Listing

Below are some of the problems of stock exchange;

  • Significant costs associated with listing on an exchange, such as listing fees and higher costs associated with compliance and reporting.
  • Burdensome regulations, which may constrict a company’s ability to do business.
  • The short-term focus of most investors, which forces companies to try and beat their quarterly earnings estimate. Rather than taking a long-term approach to their corporate strategy.

The above are some of the difficulties.

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