When it comes to discussing the global economy, the stock market is always part of the conversation.
Many of us invest in stocks as part of a long-term financial strategy or hire someone to manage a portfolio of investments that includes stocks – but even so, coming to grips with the stock market and how it works can be difficult to understand.
The stock market works as a public entity where companies can trade stock at an agreed price – participants include everyone from individual retail investors to mutual funds, banks, insurance companies and hedge funds, and also publicly traded corporations trading in their own shares. It’s one of the most important ways for companies to raise money and its origins date back as early as the 12th century.
How it works
A share of stock is literally a share in the ownership of a company you invest in. When you buy a share of stock, you’re entitled to a small fraction of the assets and earnings of that company. Companies typically choose to sell shares in their business to help raise the capital they need to expand and pay for essential functions, and look for buyers who will help them achieve this aim – in contrast, investors buy these shares because they believe the company will do well. Purchasing shares helps them benefit from the company’s profit. Companies don’t have to be listed in the stock market to sell shares – they can also issue a portion of their company to private investors with the outcome the same.
Although being a shareholder means you have some ownership in the company, it doesn’t entitle you to dictate how the business is run. Typically with large corporations you will however receive one vote per share to elect the board of directors at the annual meetings. Importantly, stocks are limited liability, meaning if the business goes bankrupt you won’t be responsible for helping to pay its debts. As a shareholder the maximum amount of money you can lose is the amount you initially invested.
The majority of stocks are traded on exchanges – places where buyers and sellers meet negotiate a price. Some exchanges are physical locations where transactions are carried out on a trading floor, like the famous New York Stock Exchange, while others are virtual and consist of a network of computers where trades are made electronically.
Brokerages act on behalf of customers to buy and sell stocks. While it was once a pastime of the wealthy, thanks to the Internet and the explosion of popularity in trading, today it’s possible to find discount brokerages through which you can buy and sell stock much cheaper but without any expert guidance.
Investing in stocks
If you’d like to invest some money in stocks there are a few ways to go about doing it. While it’s true that many people have made money from the stock market, many more have lost it – without a practical understanding of what you’re investing in and how the market is doing investing this way is about as effective as playing a game of roulette. To help you get started, Nasdaq offers a detailed guide of how to start investing on its website.
Even with a good understanding, buying and selling shares can be time consuming – typically people choose to work with their bank or a private investor to help them make the best choices and invest their money wisely on their behalf.
Keeping up on what’s going on in the economy isn’t difficult to do if you have the time and interest – websites like Financial Times and the BBC are considered authorities in the industry and regularly report on global markets, interesting opportunities and changing share prices. You can also visit the website for the London Stock Exchange to get up to date information about markets and share prices.
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