The stock exchange or simply the stock market is a component of the free market economy that is considered by most people as being more complicated than other free market components. Well, it is not entirely true. Although, I must say that anyone venturing into the stock exchange should be better equipped with an understanding of the market fundamentals and behaviors. In this article, you will learn about how the stock market works and I hope it will arm you with the knowledge you need to minimize the risk involved.
Table of Contents
What is Stock Market?
As stated earlier, the stock market is a free market component that serves as a marketplace where shares, assets and other forms of securities are bought from publicly held companies that are listed on the stock market roll.
You can think of the stock exchange as the way the traditional market works only that commodities sold are in the form of shares, stocks, securities and other assets.
How does it works?
The stock exchange works as an open but secure market that allows buyers(individuals) and sellers(mostly companies) to meet and interact as in a traditional offline market setting. Transactions are further made after interactions and agreement has been made. In the market buyers are guaranteed to have of having fair pricing, transparency, and zero to low operational risks of acquiring the available financial instruments.
When we consider further how the market works; we discover that it operates as a primary and secondary market.
As a primary market, the market allows companies to issue and sell shares (which are the company’s worth divided into several fragments and sold at a price for each ) to the public (individuals) who are also considered investors. Here, the investors, buy the share with an expectation of having a rise in value(capital) for the share over some time or to receive dividends(part of the company’s profits usually paid by a company to its investors). Sometimes, investors expect both.
The stock exchange as a secondary market allows investors to further buy and sell the securities and stocks they own.
In conclusion, the market is mainly a facilitator for the entire capital raising process done by both ends(companies and investors ) of which it receives a certain fee for this service from companies within it.
The primary function of the market is to efficiently match buying and selling orders which are achieved after it has received access to the data needed for buying and selling.
The market leverages the following data to facilitate buying and selling;
- Price transparency; this is the information of the bid(offers made to purchase securities), asks(price seller is willing to accept for the security being sold) and trading quantities for available stocks
- Price discovery; is the process of setting the proper price for an asset, security etc of which supply and demand is often considered here.
- Liquidity: the ease with a particular security can be converted into ready cash without impact on the market price.
Who can trade in a stock market?
This is one of the most frequently asked questions about the market. Well, people eligible to trade in the stock market are divided into these categories;
- Market makers – Companies and individuals who perform bids and ask for a particular security.
- Investors – Individuals who commit capital and accepted funds with the expectancy of receiving financial returns within a specified time.
- Traders – Individuals who engage in the act of buying and selling assets in the stock market either for themselves or in place of another individual.
- Speculators – Individuals who buy financial instruments intending to sell at later date to earn a profit. The difference between speculators and investors is that speculators intend to sell their assets in a shorter time than investors and their primary goal is to earn higher profits.
Benefits of Investing in the Market
- Investing in the stock market provides a great opportunity for growing money, when considering the buy at a low price and sell at a high option.
- It is a legit way of earning extra income which can be achieved in the form of dividends(which is money paid by a company from its profits to its investors who are those who have bought security or stocks from them). Dividends are a 2-way opportunity of making money.
- A stock market is a convenient approach to planning for the future. When you buy stocks, for instance, at the stock market, you buy a small piece of company ownership and net worth which would appreciate within the years.
- The market also provides an alternative for diversifying investments. Because there are several companies listed in a market, you can conveniently, buy financial instruments from different sectors and even go global to other countries. This reduces the risk of investing in one company whose worth could depreciate over time.
How is the Stock market regulated?
The market is regulated by the approved monetary authority and institution relevant to the affairs of the stock market. In Nigeria, the market is regulated by the Security and Exchange Commission (SEC).