How the stock market works
A stock exchange is a specialized structure that controls and redistributes various financial instruments. It guarantees correct and up-to-date pricing in the securities market, organizes trades. Each issuer here is required to provide its own financial statements in order to be able to participate in the auction.
The main tasks of the exchange include::
- creating a reliable functioning market for financial instruments;
- movement of finance between different countries, economic sectors in the same country, individual organizations, etc.;
- recording the time of an investor’s participation in various financial instruments;
- maintaining the liquidity and reliability of transaction processing.
What is the stock market?
This is a platform where various financial products are traded. Transactions for the purchase and sale of exchange-traded products are conducted on the stock exchange, this platform offers the opportunity to conclude reliable transactions at an adequate price.
Intermediaries between those who sell financial products and those who wish to purchase them guarantee private investors the opportunity to participate in stock trading. All interactions between market participants are regulated by the relevant law.
Naturally, you can buy securities in another place, this option is considered over-the-counter trading. However, it is not always possible to do without the services of an intermediary, since shares and bonds are usually not sold from hand to hand outside the exchange. Brokers, banking organizations, etc. also act as organizers and intermediaries outside the exchange.
In addition, over – the-counter trading is a big risk, since the contracts carried out in this way are not checked by anyone. This means that participants in the process can become victims of fraudulent schemes. Therefore, in order not to risk your own money, it is better to participate in trading on the stock exchange.
How the exchange works
Mechanisms for conducting various financial transactions affect the organization of a particular type of exchange trading. To date, there are three options::
- trading on special platforms is carried out, as a rule, on the stock exchange, this is due to the need for frequent consultations on various issues.In this case, the transaction is carried out in several stages.Having received an application for the purchase of valuable assets, the broker passes it to the trader, and he will direct the process;
- selling or buying through electronic systems is popular, as a rule, on foreign exchange platforms that are characterized by prompt exchange rate updates.The main advantages in this case are considered to be minimal costs, there are no strict time limits, there is an opportunity to get extended access to trading and a guarantee of complete confidentiality.;
- the mixed version combines the usual and electronic trading procedures on the exchange.
Any exchange, in addition to organizing trading processes, also regularly monitors the market to prevent currency fraud and scams.
Features of the securities issue
Issuers put up for sale securities (shares, bonds, etc.). These can be individual firms, cities, regions, or even countries.
The appearance of securities on the market is necessary to attract financial resources. Before starting this process for trading on the stock market, the issuer determines the amount of funds it needs and in what format it needs them.
Some companies simply “borrow” money from customers, guaranteeing future interest payments. In this case, bonds or promissory notes are issued to the market.
Other issuers offer investors to become co-owners of their business, divide the capital into shares and offer to buy them out. In this case, shares are issued to the market.
After the company chooses the option of securities, it determines their number, denomination, validity period, etc. Further, official registration of the issue is required, indicating in the state register the corresponding entries about each released product.
Major participants in stock trading:
- investors – individuals.or legal entities that invest their own finances for a long time in stocks, bonds, etc. of various companies for a stable income;
- issuers are firms that issue financial products for sale when there is a shortage of funds.
Individuals and businesses that have the necessary license can become professional active market participants. They are the link between investors and those who issue securities.
The former invest their own financial resources in order to earn income in the future. They buy and sell various financial products on the securities exchange, but these processes cannot be carried out without the services of an intermediary. To conclude purchase and sale transactions, the investor must create a special account that allows tracking all transactions. Such accounts are available to trusted investors – stock market brokers.
A broker is considered to be an intermediary between other trading counterparties that perform purchase and sale processes with various financial instruments. As a rule, this is done by brokerage banks or organizations that have the appropriate license to conduct this type of activity.
The investor draws up a formal contract with the broker and starts an account. At the investor’s request, the broker will perform various orders and services. The investor’s account will be debited for the purchase of securities and commissions for broker services. In addition, the broker calculates and withholds income tax.
Each investor chooses a convenient way to communicate with the broker: by phone or using a special Internet terminal.
When making a decision to become an investor, you need to understand that you will have to choose investment strategies yourself, brokers do not provide such services. You will also have to choose the time of purchase and the time of sale of assets yourself. The broker will not be responsible for your decisions and possible risks, it only follows your instructions. If you do not have enough experience for such operations, you can use the services of another professional market member-a trustee.
Such a manager can be a company that the investor entrusts with managing their investment portfolio according to a pre-agreed strategy. The trustee must have a special license.
The main advantage of trust management is that there is no need to regularly monitor the market and the situation on the brokerage exchange. Your profit will depend only on the manager’s decisions. That is why in this case, it is recommended to first understand how the stock market works.
The core of the stock market is a financial exchange, where all transactions with financial products are carried out. Now such instruments are considered not only stocks and bonds, but also precious metals, contracts, agreements and hybrid options that appear on the basis of different instruments.
A securities exchange is an entity that provides a platform and appropriate infrastructure for trading various financial instruments in an organized manner and according to an established algorithm.
The first task of the exchange is to connect hundreds of millions of sellers and buyers of securities using Internet technologies and enable them to conclude guaranteed and reliable transactions among themselves. The exchange’s strategy is to support market liquidity, that is, to ensure a high frequency of transactions, increased trading turnover, and, accordingly, smooth price movement to low spreads.
The activities of the stock exchange are strictly regulated. Owners may not receive any income from transactions involving the purchase and sale of financial instruments on the exchange. The exchange can make a profit from commission fees if there is high liquidity and many brokers participate in trading.
How to get on the exchange?
The functions of an intermediary on the stock exchange are assigned to a stock broker, who provides access to operations on the exchange to his clients, unlike a dealer who works on his own behalf and at his own expense. The broker allows its clients to independently carry out various transactions with financial instruments, and receives a certain percentage of the transaction value for their services.
Today, the stock market is the most attractive option for investing financial resources. Despite the presence of risks, this type of market gives the investor the opportunity to get a good profit. In modern conditions of technology development, it is not even necessary to understand what a stock exchange is and how it works. Even non-professional traders can use a broker or manager to invest their funds in financial assets and make a profit.
Procedure for conducting transactions
Most people are sure that they know everything about the stock exchange, they think that it is always very noisy, crowded, loud shouts are heard, etc. Once this was the case in reality, but now all activity is carried out in a modern format.
Any transaction on the market takes place according to the following scheme:
- the buyer leaves a request using the Internet function or phone, it goes to the electronic system of exchange trading;
- all the nuances of the transaction will be thoroughly checked by both the buyer and the seller;
- in the process of mutual settlements, the correctness and legality of the transaction is checked, and all the necessary documents are drawn up.;
- the end point is that financial products are transferred to the investor, and the seller receives money.
Making a profit on the stock exchange is not an accident. The investor’s profit depends on various factors: the appropriate strategy, the economic situation in the world, market trends, etc. Income can be predicted in advance.
The main parameter of income guarantee is the strategy. Usually, the higher the expected return, the higher the risks. Investments in financial assets are not insured, so there are always risks of losing your money, so you should always invest carefully. Beginners should first get basic skills and the necessary information, learn how to choose strategies, choose the most reliable broker, or use the services of a trustee to start with.
Professionals who know how the stock exchange works and what are the pitfalls, recommend beginners to remember that:
- the exchange sells securities issued by issuers;
- the exchange is strictly controlled by the Central Bank;
- to conduct transactions on the stock exchange, you will need at least minimal knowledge, no matter how simple it may seem at first glance;
- for trading, you should choose a reliable broker or use the services of trust management.;
- income is not guaranteed, so before investing your own money, you need to weigh the pros and cons;
- if you need any advice, contact your financial advisor.
If you take these tips into account, regularly analyze the situation on the market and in the world, you can get a constant income from the stock market.