Are you an active investor? Where are investing? Does your investment portfolio consist of stocks/equity? If it does in what percentage? This would be the questions you’re most frequently asked. Ever invested or planning to invest in stocks, if you’re and want to learn everything about stock trading then stick till the end of this article.
In any investment portfolio, you will surely find stocks/equity. Equity comes under risky assets. But as you know risk always rewards. So what exactly is stock trading? Stock trading is where buyers and sellers come together to trade stocks. They’re traded online i.e., they’re not traded physically.
There are so many people who are interested in learning about stock trading and investing in it. But there are equally concerned about the risks it poses. In an investment portfolio, you’re debt, equity proportion changes according to your age. As you get older, your investment in equity also decreases.
When you’re young you can afford to take the risk, as they say, risk rewards. But that is not the case when you near your retirement, you cannot afford to take a risk at that point of time, so you change your investments also according. There are so many horror stories around the stock market. So, it is natural for you to be careful before investing in it. You must understand that when approached in a disciplined manner you can make great profits out of it. To put an end to all your questions, you must have detailed learning about the stocks?
what exactly are stocks?
Stocks have several names, they are referred to as shares and equity too. It is a financial instrument, which represents the ownership of a corporation or company. To simplify it, when you purchase the equity of a particular company you can have a claim in their assets when the company is dissolved and you can receive a share in its profits also known as dividends.
There are two types of shares preferred and common. Common shares also referred to as equities are larger than preferred shares in both market value and trading volumes. What is the difference between preference shares and common shares then? Preference shares have privilege over common shares while receiving dividends or assets at the time of the company’s liquidation. But, they don’t have voting power i.e., any say in company board members election or auditor appointment etc. Where as common shares have voting rights. They have one vote per share held.
Why is voting power important?
Voting powers are only granted for common shareholders, and coming to the point of why they’re important. They give equity shareholders a privilege in making important decisions for the company like electing the board of directors or appointing an auditor for next term in AGM (Annual General Meeting). And they have one vote per each share held.
Why companies issue shares?
Most of the companies start as private companies. All these big companies would have had that one eureka moment, where they thought this idea would work out, which lead them to start a company. So all the companies are born from the brain of their founders. To grow big they need capital, which would give their ideas a shape, and hire staff and workplace etc. so the best way to raise capital is by going public i.e., issuing shares to the general public.
There are different ways to raise funds like using your saving, raising capital from family and friends, venture capital, angel investors, debt financing etc. Most companies raise by doing the initial public offer (IPO). By doing the IPO the companies status will from private to public. Then the companies shares are listed in a stock exchange and trading on them begins, the prices of these shares keep fluctuating as traders and investor reassess and assess the intrinsic value of them.
Stock Exchanges are markets, more precisely secondary markets where existing shareholders can sell their shares to potential buyers. Buyers should understand that when you’re purchasing certain company shares from the exchange it means that you’re not purchasing it from the company, you’re purchasing from existing shareholders of the company. Same applies for selling to when you sell you’re not selling it back to the company.
How are the share prices set?
There are many ways to set share prices in the stock market. The most common method used is the auction process, where sellers and buyers place offers and bids to sell or buy. A bid is a price where someone shows an interest to purchase, and the offer is the price where someone shows interest to sell. Trade is considered done when both bid and offer coincide.
There are millions of bidders/ investors and traders in the market. Each of them has a different idea about the value of a particular stock, so they would clearly have a different opinion at the price to buy or sell a stock. There are thousands of transactions that take place on a trading day. And all these transactions are actions of traders or investors who sell or buy stocks. And stock exchange is the platform where all these transactions are conducted, which matches buyers and sellers willing at the same price for a particular stock.
You need a stockbroker, to get access for stock exchange. Stockbroker acts as the middleman between buyers and sellers. You can create a demat account with any of the established retail brokers for a stockbroker and perform transactions on the stock exchange.
Supply and demand influences on Price
When there are more buyers for a specific stock than sellers, the price of that stock will go up. Similarly, if there are more buyers than sellers for a specific stock, the price of that stock will go down.
Bid-offer spread or bid-ask is basically the difference between the bid-price and the offer price is basically the difference between the highest price a buyer is willing to pay and the lowest price at which a seller is offering a particular stock. If there are more buyers than sellers for a stock, the sellers may increase the price as there are a lot of buyers willing to purchase. When there are sellers more than buyers, they may accept even the lowest bid to sell the stock, which may influence the stock prices in the stock market.
However, there are markets that rely on professional traders to maintain their bids and offers. They make continuous bids and offers to find a potential buyer or seller. A two-sided market consists of both of them, the difference between a bid and offer is called spread. The high-quality stock market usually has low bid-ask spread.
Stock market Indices & Market Capitalization
Traders must understand about stock market indices too, these indices represent the aggregated price of a certain number of stocks, and the movement of that index signifies the movement of all those stocks. So when people are talking about stocks or stock market they are normally talking about major indices. And some of the popular indices in the world are S&P 500, FTSE Index, Russell Indices, Sensex, Dax, Nikkei, etc.
And the companies can be classified as large-cap, mid-cap and small-cap based on their market capitalization. Stock classification by sector is done by an industry standard called Global Industry Classification Standard. This was developed by S&P Dow Jones and MSCI indices. There are overall 11 sectors and 24 industry groups. 11 sectors are Energy, Materials, Industries, Consumer Staples, Health Care, Finances, Information Technology, Communication Services, Real Estate, Utilities, Consumer Discretionary.
Stock markets are easy once you understand them. Studies prove that you can make a great return on investment if you invest in a disciplined manner. There are the largest stock markets in the world like NYSE, Nasdaq-US, Japan Exchange Group Inc, etc. All these stock markets are trading hundreds to thousands of transactions in a single day. And from big to small there are many companies, whose shares that are being traded every day. You can trade online buy learning it and you can take classes to learn and improve your trading skills or open an account with a leading broker. You can test your skills with online trading platforms, where you can play using virtual money in the real platform. So that you can practice and get ready for the real market.