What Makes a Market Work
The idea of investing in the stock market may seem scary especially if it is your first time trying it. Many people end up discouraged by stories of investors losing most or all of their money.But the stock market also offers plenty of opportunities to grow your wealth with the click of a couple buttons on your computer. So let’s take a look at how the stock market works and how you can use it to your advantage.
What Are Stocks and How Do They Work?
Also called a share or equity, stocks are a financial instrument that signifies a percentage of ownership in a company or a corporation. It represents a claim on a fraction of a company’s assets and earnings.A stock owner is a shareholder who owns a certain percentage of the corporation. This percentage is equivalent to the number of shares held which is a fraction of the company’s total outstanding shares. Thus, if an investor owns 400,000 shares of a company with 4 million outstanding shares, he or she would have a 10% ownership stake in it.
A Variety of Stock Types
There are three types of stocks:1. Common Stock
An investor has the right to attend company's meetings by holding a common share, which carries voting rights. However, voting rights are not equal. Companies can grant a shareholder one, two, or multiple votes according to the shares held.
2. Preferred Stock
As a result, preferred shares do not come with voting rights. This is because the holder chooses the preference in an organization to receive dividends and assets in the event of liquidation. In other words, if a company becomes bankrupt, preferred stocks dividends will be paid after the company's debts are settled.
3. Dividend-Producing Stock
Depending on the company's profit, it may decide to pay a dividend to shareholders. Dividends are some form of reward to an organization’s shareholders. They are totally determined by the company, which means that the corporation may increase or decrease the dividends as it pleases.
Stocks: How Do They Work?
The stock market is like an auction platform where investors buy and sell shares of stocks based on the highest price willing to be paid by a buyer and the lowest price a seller is willing to sell their shares for.Stock prices are a representation of supply and demand and when it is lopsided prices move. For example, if there are more sellers than buyers, supply will outweigh demand and prices will fall and vice versa.
Shares are sold by sellers at the highest possible price, hoping to get more than what they paid for them. Stock buyers hope to get a good deal by buying at the lowest possible price.
The difference between what a seller is willing to sell for and what a buyer is willing to pay is known as the spread. So if a stock has a buyer at $10 and the lowest seller is at $10.25 then the difference between those two numbers is the spread, which is $0.25.
How Should I Invest in The Stock Market?
Unfortunately, only investors with large accounts can trade on the floor of the stock exchange. However, if you want to trade stocks you can open an account with an online broker for a generally cheap commission. Your options include hiring:• Financial Advisors who usually charge an annual fee or per transaction fee
• Large banks which in addition to executing trades will also provide financial planning
• Online brokers who charge a small fee for every transaction
The majority of investors will invest in stocks through mutual funds. These are companies that buy a collection of stocks and hold them in a fund and then sell shares of that fund to investors. The investor can choose to buy the stocks directly instead of owning shares in the mutual fund based on their financial goals and timeframe. Mutual Funds are a diversified investment which means they tend to carry less risk than owning a single stock outright.
However, some investors like picking the companies they own and will buy them individually. The most effective way to do this is by selecting strong companies with a track record of growth or sustainability. This reduces your risk and gives you a better chance at making a profit.
What Determines the Stock Price?
Stock prices tend to fluctuate up and down over time depending on supply and demand. Price fluctuation is a direct result of supply and demand. If a stock is on high demand due to the recent success of the company or a strong industry sector, its prices tend to move up. This is because there are more buyers than sellers.On the other hand, if investors are not willing to buy a stock due to the company posting weak earnings or guidance, its price will fall. This is because there will be more sellers than buyers creating more supply of the stock in the marketplace.
Final Thoughts
With any investment, there are risks, and the stock market is no different. By understanding how the stock market works you put yourself in a better position to make smarter, more informed decisions.##### STAY CONNECTED TO B4SIGNALS:
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