What are Stocks and How do they Work?
When people hear the words “stock market,” they either think of it as a way to become rich overnight or in worst cases, where they lose all their money in just a few minutes. These are two extremes of how stocks work, and the fact that they are how the average person perceives stocks and stock markets shows just how much there is to learn.
A stock is an equity investment made in a company that gives you part ownership of that company. In simpler words, a stock is a piece of a company, and when you buy a stock, you become an owner of that piece of the company. It is also referred to as a share.
How are stocks or shares traded and how does the stock market work?
Companies often “go public” when they want to raise money. This means that the company is open to investment from the public and this is done by making an initial public offering or IPO. An IPO is an act of issuing shares of the company for public investment for the first time, where prices of the shares are determined based on the estimated worth of the company and the number of shares being issued. Once shares are sold, the company keeps the money for the expansion of business, while the shares are continually bought and sold from investor to investor on an exchange such as the London Stock Exchange or New York Stock Exchange.
How does an investor benefit from such trading? Well, the company only receives the money from the Initial Public Offering (IPO), and once the shares are bought and sold from investor to investor, the money is also exchanged only between investors.
In simple words, a stock market is where investors trade shares. Initially, stock markets were actual, physical places like a literal market, with trading floors always busy in New York, Tokyo, London, and Frankfurt. However, today, stocks can be bought and sold electronically. You can make your bid through a broker.
Stocks are listed using ticker symbols or stock symbols on the market. Ticker symbols are basically abbreviations of a company that is used to identify the shares of a particular company. For example, the ticker symbol for Facebook is “FB,” while for Microsoft, it’s “MSFT,” and for Twitter it’s “TWTR.”
When you search a company’s ticker symbol on your broker’s website, you will see a price listed next to it. This quoted price is the most recent amount which was paid by investors for a share of the company. It is to be noted that the stock market is a very volatile market, where prices can change depending on the latest news or the mood of the investors.
Why do investors buy and sell stocks?
The main reason why investors trade in stocks after the Initial Public Offering is because with time, the value of a company changes. Depending on the accuracy of their perceptions of predictions or that of their brokers, investors can make more money or lose money from buying and selling stocks.
Accurately predicting which stocks will increase or decrease in price can be very challenging. Stocks, as a whole, tend to rise over time, and many investors take advantage of this through what is known as diversification, which means investing in more than one sector. Investors who do this hold on to their stocks for a long time and only sell them when that sector, or company’s perceived value in terms of share prices increases.
Not all investors have the same goal, which results in them buying and selling stocks at different times. Depending on your agenda, it is always wise to know the right time to trade your stocks.