How Does the Stock Market Operate? A Short Insight
Does the stock market and investing in it seem overwhelming to you? Don’t worry because you’re not alone in this. The fear of the stock market is so common among Americans that it’s been studied as anxiety in the past. In truth, investments like stock markets and precious metal investments can be confusing but easy to grasp if one understands how the market operates.
Stock – What is it?
Before moving on to the stock market and how to own stocks to make money, it’s important to understand what a stock is. A stock is a financial unit that describes the ownership of a particular company. Stock is commonly referred to as a share or, in more technical terms, a company’s equity.
A stock’s value is determined by the total valuation of the company in the market divided by the number of stocks available for sale. For example, a company worth $1 million with 500,000 available stocks would make a single stock worth $2.
Stocks are owned to proclaim a share in the total profit of a particular company. This distribution is determined based on the profit made compared to the stocks owned. For instance, if you own 50,000 stocks out of the 500,000 available units, you get a 10% equity on the company’s total assets.
Stock Market – What is it?
The stock market is a financial framework and one of the key elements of the economy. The stock market refers to the listing of companies that offer shares of their equity and the transactions made between shareholders and potential buyers.
People often confuse the stock market with the stock exchange and use these terms interchangeably. The stock market is the entire financial system, while the stock exchange is the platform that enables transactions of stocks between buyers and holders. While there’s only one US stock market, 13 stock exchanges are operating within the country.
The stocks that people buy aren’t bought directly from the company but from people that already own them. Similarly, when a holder sells their stocks, they don’t sell them back to the company but to the buyers on the platform.
Investing in Stocks
Stock market investments may not be as stable as gold and silver investments, but they’re known to be the most profitable out of all other asset classes. This is because stocks are volatile and may present high profits in a short time, unlike investing in precious metals.
You can earn from the stock market in capital or dividends. Capital is earned by selling stocks to a buyer at a higher price, while dividends are shares of profit that the company distributes among the shareholders.
Capital earning can shift from one way to another and pose a high risk to the portfolio, while earning in dividends is a safer bet, but the profits aren’t as frequent.