What is the stock market? All you need to know about Stock Market
Everyone has heard of words such as stocks, bonds, brokerage accounts, and the stock market. But at the beginning of the investment journey, few people can clearly combine all these concepts into a coherent picture. So now I will tell you how the stock market is organized and what it consists of. What securities, participants, and finally what you can buy there. After which the picture of the stock market will become clearer.
I will start with the participant, without whom the stock market can’t exist - the stock exchange.
The stock exchange is the place where all the financial instruments are traded, which you, as investors, can buy, sell and build investment strategies with them.
It ensures that the stock market and all instruments traded on it are continuously operating.
Currency - a section where you can buy or sell currency.
Stock - the most basic and well-known investment instruments are traded, primarily shares and bonds.
Futures - options and futures are traded there. These are very risky financial instruments and a beginning investor will not be interested in them.
Where do securities come from?
They are issued by issuers - companies, the state, or its individual regions - to raise financing.
Often issuers simply want to borrow money from investors at interest, and to do this they issue bonds - effectively promissory notes.
Companies can also offer investors the chance to become co-owners of their businesses. Issuers then issue shares that entitle the purchasers to a share of the company's profits (dividends) and, in certain cases, to participate in the management of the company.
Who controls the order on the stock market and exchange?
This is done by the regulator, a government organization that oversees the work of all professional participants in the stock market: brokers and managers as well as registrars, depositories, and stock exchanges.
In different countries, there are different regulators, for example, in the UK the Financial Conduct Authority regulates the financial services industry.
Don't trust your money and assets to intermediaries who are not licensed. If your rights are violated by illegals, the regulator will not be able to protect you. In this case, you will only have to go to the police, the prosecutor's office, and the courts.
What's for sale here?
There are many different financial instruments on the stock market. And a beginning investor only needs to know about three of them. They are stocks, bonds and ETF index funds. Let's find out what they are and what they're about.
These are equity securities. That is, when you buy a share, you are buying a small stake in a company's business, which entitles you to a portion of its profits and property. When you buy a share you become a co-owner of the company, and it doesn't matter how much of it you own, even just one share, the company will treat you like a full owner: it will send you invitations to shareholders' meetings and report on the financial results. Shares are a high-risk instrument that has no fixed returns. Remember, investing in stocks can make or lose your investment.
If the business of the company whose shares you have bought grows, over time you will start to reap the benefits that will be discussed below.
If you are uncomfortable with the vast swings in the value of stocks, it makes sense to look at a conservative, less risky investment: bonds.
A bond is debt security. That is, when you buy one, you are lending money to the issuer.
Consider the analogy of a loan from a bank. The bank gives us a loan for a certain period and tells us how much we have to pay for the use of the loan. The bank acts as an investor in bonds, but it does not lend the money to a specific person, but to a company, a region, or an entire country.
Bonds come in two varieties - discount bonds and coupon bonds.
There is another interesting instrument on the stock market that is very popular with first-time investors and those who prefer passive investments. It is an exchange-traded fund or ETF (Exchange Traded Funds). With this tool, an investor has the opportunity to buy "the whole market". And this instrument doesn't require an independent selection of assets. Let's break it down. Imagine that you are making a salad with a lot of ingredients. Ingredients are the big companies. You then divide the salad into several portions and get small portions - that's our ETF. A balanced portfolio consisting of stocks from different sectors.
Where are the securities kept?
Today, all stocks and bonds that are traded on stock exchanges are book-entry - they exist only in the form of digital codes. When an issuer issues securities, the registrar creates a register of the company's shareholders or bondholders on its server and keeps it up to date. This register keeps track of who owns the securities and how many.
These registers help issuers communicate important news (e.g. dates of general meetings), and accrue dividends on shares and coupons on bonds to the owners of the securities.
The company's founders can keep some of the shares or bonds and continue to hold them in the registry. But stock trading is only possible through a system of depositary companies, which record information about all transactions on exchanges. This system includes the country's central depository, the stock exchanges' depositories, and the depositories of all brokers and trustees.
The central depository holds securities of companies that are listed on any exchange in the world.
I want to trade in the stock market. Where do I start?
It is important to remember that investments in securities can always turn into losses. You should only become an investor if you have available funds and are prepared to take the risk.
Buying and selling securities is not a casino or a lottery, but a careful calculation.
Structure of the investment portfolio
We have defined the objective and the strategy to achieve it, now it's time to consider how to structure your investment portfolio.
There are three main types of investment portfolio structures.
· Conservative - this is a portfolio structure with a return of 6-8%, and with low risks. With this structure, your capital will grow slowly.
· Aggressive - a portfolio structure in which aggressive instruments predominate. Investments with a higher degree of risk, but with the possibility of good profits.
· Moderate - a portfolio structure that is something in between conservative and aggressive instruments.
Advantages of investing in the Stock Market
Build. In the past, returns from long-term equity investments have outperformed those from a cash or fixed-income assets like bonds. Stock values, however, typically fluctuate over time. Since stock market swings do tend to level off over longer time periods, investors may wish to think about a long-term view for their equity portfolio.
Protect. Inflation and taxes might affect your wealth. Long-term equity investments can provide investors with better tax treatment, which can assist mitigate or stopping the adverse impacts of both taxes and inflation.
Maximize. Some businesses provide special payments or dividends1 to shareholders. These payments can increase your return and give you monthly investment income, and the favorable tax treatment of Canadian stocks can put more money in your pocket.
Simple to purchase: Stock market trading makes it simple to purchase company shares. They are available online, through brokers or financial planners, or both. After creating an account, you may purchase stocks immediately. You could even be allowed to buy stocks through your company if you run a small business.
You don't need a lot of cash to start investing in stocks: The majority of retail brokers, including Charles Schwab, provide commission-free stock purchases and sales. Some brokers, like Fidelity, do not demand minimum account balances. If your broker allows it, you can also purchase fractional shares if the stock you wish to buy is too pricey.
Disadvantages of investing in the Stock Market
Risk: Your entire investment might be lost. Investors will sell a company's shares if it performs poorly, which will cause the stock price to fall. You will not recover your initial investment when you sell. Bonds should be purchased if you can't afford to lose your original investment.
Commissioners were paid last: If a corporation fails, preferred investors, bondholders, and creditors are paid last. But that only occurs if a business declares bankruptcy. If any firm fails, a well-diversified portfolio should keep you secure.
The increasing likelihood of volatility
Stock investment entails its own bets due to how unpredictable and dynamic markets are. Multiple price swings in shares occur in a single day. Most of these movements are unpredictable, which can put investments at risk. Furthermore, even if the likelihood of a significant collapse is low, it can take years for the market to fully recover from a catastrophe.
Brokerage might reduce profits.
Investors are required to pay a set percentage to the broker in brokerage fees each time they decide to purchase or sell shares. Profitability may therefore be in danger.