The stock market is a financial mechanism through which buyers and sellers of securities carry out transactions between themselves.
You should remember that the placement of securities which are issued for the first time occurs on the primary market, and then their resale – in the secondary market. The Stock Exchange is in fact about organizing the functioning of securities as well as other financial instruments. The activity of stock exchanges aims to facilitate the movement of money capital between different economic actors. The course of securities is mainly formed on the stock exchange.
Who are the participants in the stock market?
We can differentiate the following participants of the securities market:
The issuers – they are legal persons authorized to represent the state. They attract money through the issuance of securities and fulfill the obligations associated with these;
The investors – they are physical and legal entities that buy securities, pursuing different objectives;
Professional market participants – usually they are legal entities and individuals who have, in accordance with the law, the right to work professionally with securities: dealer, broker, etc.
The securities shape their course depending on demand on the stock market.
The security is a cash document certifying the property rights of the owner in relationship with the entity which released the paper. As a rule, securities exist either as a separate document or as a record in the electronic accounts.
On the stock exchange there are traded securities of such types as:
Shares – these are securities that give their holders the right to claim a share of the profits (which is paid as dividends), as well as manage the business, or part of it which remains after liquidation. There are preferred and common shares. The holder of preferred shares may receive a fixed dividend rate, but he will be deprived of the right to vote at the general meeting of shareholders.
Bonds - This paper refers to the debt and a fixed percentage of revenue. If you buy a bond, it would be like to borrow money. The only difference is that in the case of bonds, these are offered by the government or a specific company.
Derivative securities (also known as a derivative) - they entitle the owner to make the purchase or sale of equity or debt securities, as well as products under the terms of which are stipulated in advance. Such securities include, for example, options, warrants and futures.
In order to carry out a global assessment of the securities, there are used stock indices to reflect the price movements of shares. Here are only few best known indices, the ones that are used in different countries with an enviable rate: FTSE-100, Nikkey-225, S&P500, the RTS index, Bovespa, DAX-30, and so on.
The work on the stock market
The most convenient strategy that works on the exchange is to invest for long term, where the recommended period exceeds one year. Long-term investment has many of its advantages. To verify this, it is necessary to view the charts of industry and stock indices for a selected period.
The strategy has an important component - diversification, which relates directly to the investment portfolio. Moreover, the timeframe that is set on this process shows how well the invested funds are distributed in accordance with those or other types of investments and risk reduction objectives.
A simpler but less reliable method is the industry diversification: the distribution by sector of funds on the shares. Long timeframes and diversification can smooth drawdown of the market, and also contribute to increase profits. With this strategy the margin is not used, and thus the possible risks are reduced.
A serious impact on the decision when investing for long term, as to buy and to sell, is provided by data from fundamental analysis.
In turn, data obtained through technical analysis is used to determine the points of opening and closing positions, depending on the selected instrument. Thus, long-term investments are highly compatible with different spheres of activity.
If you choose a short-term investment, or, in other words, a speculation method, you should bear in mind that it implies an increased risk that is able to compensate only a certain amount of potential income.
With speculative trading methods you can use margin. It can increase profits, but also increases the risk. It should be noted that when using the speculative method of work, market participants require continuous monitoring of certain market position.
The practical aspect of the stock market
To technically get started it is not difficult. Yet, it is difficult to choose a strategy that would be correct, wise and would meet your needs. The strategy will influence the whole future activity. In addition, you should determine what type of analysis to be used: a fundamental or a technical one?
To use fundamental analysis, you must have knowledge of economic theory. Technical analysis is to describe the patterns using mathematical methods. But at the same time, economic or technical education is not a prerequisite for success in your work.
In order to create a diversified stake, you will need to take into account many factors. In this context, it is useful to self-study, since any kinds of courses will give only the basics of knowledge. The main portion of experience, knowledge and understanding of market conditions is acquired during experiencing the financial market on your own.
Since during the process you will probably have questions, a great solution would be to study special literature which will give the opportunity to respond to them.
However, the psychology states that you cannot learn from others’ mistakes as long as you don’t commit by yourself and won’t make appropriate conclusions. It is important not to lose the sense of reality and attention, so as not to confuse the serious business with high risks in the stock market with gambling.
Otherwise, your mind will have an obsession to recover the past losses. It will disturb you to make the right decisions and soberly assess the situation.
The work will be successful only when you will reach a certain level of experience, and will acquire a good knowledge base regarding the intricacies of trading in the stock market.