What Is the Stock Market? How It Works explained by professional Forex trading experts the “ForexSQ” FX trading team.
What Is the Stock Market? How It Works
Definition: The stock market is where you can buy, sell, and trade stocks any weekday. It’s also known as a stock exchange. Stocks allow you to own a share of a public corporation. The stock price is based on the corporation’s earnings. If the company does well, or even if everyone thinks the company is going to do well, the stock price goes up. In addition, many companies give a little dividend payment each year to the stockholders, which provides extra value.
Why Companies Sell Stocks
Stocks are how companies get funded to grow larger. Usually, when someone wants to start a business, they pay for it with loans or even their own credit cards. Once they grow the company enough, they can get bank loans, or even float their own bonds to individual investors.
Eventually, they’ll need a lot of money to really take the business to the next phase. This is when they will sell the first stocks, called an Initial Public Offering. Once that happens, no individual person owns the company because they have sold it to the stockholders. Since the U.S. stock market is so sophisticated, it is easier in this country than in many others to take a company public. This helps the economy grow, since it provides a boost up to companies wishing to grow very large. For more, see How Does the Stock Market Work?
Why Invest in the Stock Market?
Stock market investing is a good way to gain returns that beat inflation over time.
However, stocks are riskier than bonds because you can lose your entire investment if the company goes out of business and the stock price falls to zero. For more, see How to Buy Stocks and Benefits of Investing.
But There’s Risks — Stock Market Crashes
When prices in the stock market decline less than 10%, that’s known as a stock market correction.
When prices fall that much or more in one day, it’s known as a crash. When prices fall 20% or more, it’s known as a bear market. These usually last 18 months. The opposite is a bull market, and they generally last two to five years. For more, see What Is a Stock Market Crash?.
What Are the Major World Stock Markets?
Nearly every major country has a stock exchange. Here’s the top 10, by total market capitalization, and the most quoted indices that are closest to measuring their performances:
- New York Stock Exchange – The major indices are the Dow Jones Averages and the S&P 500.
- NASDAQ – The index is also called NASDAQ.
- Tokyo Stock Exchange – Nikkei 225 Index.
- London Stock Exchange – FTSE
- EuroNext – CAC (Paris), AEX (Amsterdam), BEL (Brussels), PSI (Lisbon).
- Shanghai Stock Exchange –
- Hong Kong Stock Exchange – Hang Seng.
- Toronto Stock Exchange – SPTSX.
- Bombay Stock Exchange – SENSEX.
- National Stock Exchange of India – NSE Nifty.
- BM&F Bovespa (Brazil) – The index is also called BOVESPA. (Source: Forbes,
The U.S. Stock Market Is the World’s Financial Capital
The U.S. stock market is often referred to as Wall Street, since the NYSE and so many traders are based there. Its sophistication means that information on companies is easy to obtain.
This increases the trust of investors from around the world. As a result, the U.S. stock market attracts more investors. That makes it even easier for a U.S. company to go public.
The performance of the general U.S. stock market is tracked by its three major indices (the Dow, S&P 500 and the NASDAQ). Different components are also tracked. For example, the MSCI Index tracks the performance of stocks in emerging market countries such as China, India and Brazil.
Other Financial Markets
The stock market is just one type of financial market. Before you invest, make sure you are familiar with them all:
- Mutual funds are an easy way to target a group of stocks.
- Bonds are really large corporate or government loans you can invest in. They offer lower risk, and lower returns, than stocks.
- Commodities are usually traded in futures options, which makes them more complicated. They include grains, oil and the strangely-named pork bellies.
- Foreign exchange is where people buy and sell currencies. It’s very high risk because the values can change dramatically for no apparent reason very quickly.
- Derivatives are very complicated securities that derive their value from the underlying asset, such as subprime mortgages. Individual investors should stay away. Even though they can offer huge returns, they can also deplete your entire life savings in a day.
- Hedge funds are sophisticated investment companies that use derivatives to try and outperform the market. They don’t usually succeed.
What Is the Stock Market? How It Works Conclusion
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