Are you wondering what the stock market is or how it functions?
Have you ever seen people screaming into three phones in front of a screen with flashing numbers and wondered what on earth they were doing?
Stop wondering and relieve yourself with the good news that you can increase your awareness about what the stock market is and how you can improve your financial condition.
Here are 9 essential questions about the stock market
#1: What is the stock market?
The word stock market, as used across traditional and modern media, usually portrays the image of a kind of financial casino. Hey, the stock market means much more than that. It is a potent instrument for low risk wealth creation.
When you consider the stock market as a venue for producing wealth, you can concentrate on financial strategies that will help you achieve this goal.
The stock market refers to all the existing stock exchanges around the globe. For instance, there is the New York Stock exchange, The American Stock Exchange and the NASDAQ in the US. In the UK, they have the London Stock Exchange. In Germany, they have the Frankfurt Stock Exchange. Each of these systems is considered a stock market and, collectively, they are oftentimes referred to as financial markets.
A stock market is simply a venue where people can visit to acquire and sell shares of companies in order to make money for themselves.
You can buy and sell shares from a variety of diverse stock markets worldwide and use financial blogs like ADVFN or Yahoo Finance to get information on the stock market for free.
#2: What is a stock exchange?
Think of the stock exchange as a supermarket where you buy your groceries; you can get almost everything you need under one roof.
A stock exchange is a supermarket where you can buy and sell stocks and shares.
Individual investors, banks and hedge funds can buy and sell shares and stocks on any of these stock exchanges. One clever way to find out on how you can canvass around for shares on a stock exchange is to concentrate on your own country's stock market.
Consider these points:
Are there any businesses listed on your home stock exchange that are mentioned on ADVFN or Yahoo Finance?
Banks and supermarkets are the most familiar enterprises listed on stock exchanges.
Did you have good or bad experiences in the past with these companies?
To search for companies on ADVFN or Yahoo Finance, simply key in the company name into a search box and a list of names will pop up on which you can select your target company.
You can archive company names you are looking for into a watch list. By creating watch lists, you can readily access a company's information without having to look for it each time you visit ADVFN or Yahoo.
By monitoring companies you have knowledge about, you will strengthen your financial knowledge.
#3: What is a share?
In the US, shares are also known as stocks. A share is one unit of ownership of a business.
When a company "registers" itself on an exchange, it issues a large number of shares for people to trade or exchange (that is, buy or sell). A single share is a unit of the company's stock value that a person can buy and own.
Let us consider a company that has $100 million in assets and $50 in total liabilities. That means its value is $50 million. If that company has issued a sum of 50 million shares, the value per share is $1, as computed below:
$50million of value divided by 50 million shares = $1 of value per share
If the present market price for each share is 75 cents, then its share are undervalued by 25 cents.
Tip: the stock market only establishes the price of a stock, not its value. Value is evaluated by diligent evaluation of a company and its financial statements.
What you see as stock market prices flashing on trader's screens or printed in the newspaper signifies the price of a single share of stock.
What about those people screaming into phones? Probably gambling and throwing away lots of money. Value investors, on the other hand, never gamble and never lose their cool during crises and depend rather on investment rules to guide their financial decision-making.
#4: Why do companies issue shares? Stock exchanges give opportunities for companies to issue shares to various investors in exchange for money.
The sum of money every firm gets from issuing shares hinges upon the quantity of shares issued and how much each of their shares is valued.
Companies will frequently utilize the cash to build up their businesses instead of borrowing the cash from a bank through a loan.
As an example, a company may presently have outstanding bank loans and based on their business plan or conditions of their current loans may not be qualified to take out any additional loans. Issuing shares provides a way out of this problem.
If companies are capable of developing and enhancing their businesses, they can opt to acquire back some or all of their shares. On the other hand, they may choose to issue additional shares in the future if they require more money for their business.
