The stock trading market is like a library of exchanges and markets, where the buying and selling of shares of publicly owned companies take place. Stocks themselves, known as equities, stand for a fraction of a company’s ownership. Financial activities of this sort, perform under established and formal exchanges or regulated over the counter (OTC) marketplaces. Do not let the two terms, stock exchange and stock market confuse you. Although the two are interchangeable, trading on the stock market means buying and selling shares/equity on more than one stock exchange out of the entire stock market altogether.
Understanding stocksTo understand the stock trading market, one needs to know what stocks are. A share of stocks, known as a minuscule unit of a company’s ownership. Owning a share of stock of a company makes you part owner of the company. Being a part owner of a company gives you rights such as voting for the board of directors’ membership and several other essential company matters. If profits got distributed to shareholders, you too might get a proportion of the shares. One of the unique advantages of owning stocks; limited liability if a company goes through a lawsuit and loses and required to pay a significant judgment. Your assets will be safe; however, your stock may be worthless.
Understanding stock trading marketsLet’s use a more practical example. When fall comes around, people drive for miles sometimes to get to a pumpkin patch to get themselves some pumpkins. Or when you need some groceries, you go to places like Walt-Mart for your daily commodities. The point is that there is almost always a market for all products and services. Since there is more than one market participant for these commodities, the pricing may be fair. However, in a situation where for example there is one little pumpkin patch in the whole city, they have the power to charge whatever price they desire. People will have no choice but to buy anyway since there is nowhere else to go. If there are more pumpkin patches in the city, then the buyers have the power to choose. Now since the pumpkin patches are competing for buyers, the prices become more flexible. A stock trading market is no different except it has to do with the trading of a variety of securities in a managed, safe and controlled environment. Since in a stock trading market hundreds of thousands of market partakers who are wanting to buy and sell their shares are brought together. Transactions are sure to be transparent and the pricing fair.
What is the actual purpose of the stock trading market?The stock trading market has two major roles to play. The first one is to offer companies capital which they can use to fund the growth of their businesses. Let’s assume a company issues out one million shares of stock that are going for $20 a share, that gives a company capital of $20 million to expand its business subtracting, of course, all the fees incurred in the process. Issuing out shares rather than borrowing money to grow is the best option for a company because it avoids debt. And the interest charges paid on that debt. The second responsibility of the stock trading market is to provide the chance to share the profits of the companies that are publicly-traded to the investors that buy the stocks. There are two ways in which investors can profit from purchasing stocks. The first way is by receiving regular dividends. The second is by reselling their stock when the price increases from the initial buying price to make a profit. For instance, if an investor purchases shares at $20 a share and then the prices successfully rises to $30 per share. If the investor decides to resell his stock at the cost of $30, he makes a 50% profit on his investment.
How does the stock trading market work?We have already established that the stock trading market offers a safe and secure regulated platform for market participants to buy and sell shares/equity with low to no operational risks. As operations take place under strict rules and regulations, the stock trading markets act as primary markets and secondary markets.
The stock trading market – Primary and Secondary marketsThe primary market, where the stocks get created, and the secondary market, where shares get traded. When a firm decides to go public for the first time by raising an IPO (Initial Public Offerings), this takes place in the primary market. The company sells its shares directly to the investors. After buying shares for the very first time in the primary market, traders then buy and sell these shares among themselves in the secondary market. The company which issued the share in no way gets involved directly in the transactions that occur in the secondary market. Furthermore, the stock trading market as a primary market acts as a platform for companies to sell their shares to the general public for the first time, and this process is called the initial public offerings (IPO). The IPO fundamentally means that for example a company is divided into 20 million shares. 5 million of those shares will get sold to the public for $10 a share. However, to sell these shares, a company would need a marketplace, which is then provided by the stock market. Ultimately if the transactions run smoothly, then the company would have raised $50 million from 5 million shares. Those investors anticipate the rise in the share price so that they can sell them in the secondary market.
Who partakes in the stock trading market?
These are managers who take a collection of securities and trade them for their clients. The portfolio managers make the buying and selling decisions after having consulted an analyst first. Mostly hedge funds, pension plans, and mutual funds often make use of portfolio managers, as they need the best financial decisions made for them on the money they own.