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Market Analysis

How Does the Stock Market Work?
Amos Simanungkalit · 7.1K Views

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The stock market, though not a physical location, is the arena where shares representing ownership in companies are traded, predominantly online. It serves as a crucial platform for companies to raise capital and acts as a barometer of economic health.


Stock prices fluctuate due to various factors such as supply and demand dynamics, company performance, economic conditions, and even investor sentiment, which can sometimes defy rationality. When buying or selling shares, it's essential to consider these factors.


Investors engage in stock purchasing for diverse reasons. Some seek regular income through dividends, while others aim to capitalize on potential price appreciation by buying low and selling high. Additionally, some investors acquire stocks to influence corporate decision-making by exercising their voting rights at shareholder meetings.


While "stock market" and "stock exchange" are often used interchangeably, they are distinct concepts. The stock market encompasses the entire ecosystem of buying and selling shares, while stock exchanges, such as the New York Stock Exchange (NYSE) and Nasdaq, serve as specific platforms within this broader market.

 

How Is the Stock Market Operational?


Shares of firms are purchased and sold on the stock market, which is a huge and intricate network of trading activity that is regulated by regulations to prevent fraud and other unfair trading practices. Because it makes it possible for money to flow between investors and businesses, it is essential to modern economies.

 

Looking at something's components is sometimes the greatest approach to understand how it functions. In light of this, let's go over the main components of the stock market, including the exchanges, stocks, corporations that sell shares, and indexes that provide us with an overview of the state of the market:


What are Public Companies?

 

Public companies are entities that have offered their shares to the public through an initial public offering (IPO), allowing them to be traded on stock exchanges such as the NYSE or Nasdaq. Before entering the market, these companies must adhere to strict regulations and financial disclosure laws. The primary market, where companies initially sell their securities, involves various methods such as IPOs, follow-on public offerings, and private placements to raise funds. Once listed, stocks are traded on exchanges or over-the-counter platforms in the secondary market. Currently, there are over 58,000 publicly traded companies worldwide.


What Do Stocks Mean?


Purchasing stock or shares entitles you to a portion of the business. The number of shares the firm has issued and the number of shares you own determine how much of the company you own. In the case of a small, privately held corporation, one share may be worth a significant portion of the business. Shares of major public businesses might number in the millions or even billions. For instance, a single share of Apple Inc. (AAPL) represents a very small portion of the corporation given the billions of shares that are in circulation.

 

In addition to the opportunity to vote on corporate issues, owning shares entitles you to a portion of the company's revenues, which are frequently distributed as dividends.

 

What is a Stock Exchange?


A stock exchange is where publicly traded companies' stocks are freely bought and sold among investors. This secondary market, tracing back to at least 1602 in Amsterdam, has evolved into complex institutions. These exchanges, though often virtual, serve as organized and regulated platforms for trading various securities, like stocks and bonds. They play a vital role in the financial system by facilitating companies' fundraising efforts through public stock offerings.


Prominent examples include the NYSE and Nasdaq, where stocks are traded centrally. Globally, there are major exchanges like the London Stock Exchange, Tokyo Stock Exchange, and Shanghai Stock Exchange, each governed by its own set of rules and regulations. These regulations ensure fair trading practices and investor confidence. Moreover, exchanges provide real-time information on securities prices, facilitating transparency in trading.


Central to their function is liquidity, enabling swift buying and selling of stocks during trading hours. Additionally, many exchanges cross-list company shares, allowing firms to access a broader investor base and providing traders with more options.

 

Market Over-the-Counter


Securities, including stocks, are also exchanged "over the counter" (OTC). In these over-the-counter (OTC) marketplaces, you can trade equities directly with other investors, usually without the same level of public scrutiny or supervision. In over-the-counter (OTC) trading, a network of brokers and dealers conducts direct phone and computer network negotiations.

 

Smaller, less liquid businesses that might not be able to meet the strict listing standards of the stock exchanges sometimes employ this kind of trading. As a result, it could be harder for investors to find trustworthy information on the businesses they are funding.

 

 


Disclaimer


Derivative investments involve significant risks that may result in the loss of your invested capital. You are advised to carefully read and study the legality of the company, products, and trading rules before deciding to invest your money. Be responsible and accountable in your trading.


RISK WARNING IN TRADING


Transactions via margin involve leverage mechanisms, have high risks, and may not be suitable for all investors. THERE IS NO GUARANTEE OF PROFIT on your investment, so be cautious of those who promise profits in trading. It's recommended not to use funds if you're not ready to incur losses. Before deciding to trade, make sure you understand the risks involved and also consider your experience.

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