Understand stock market
Everyone is constantly talking about this – the economy, the crisis, the fall or rise of the currency, the gross domestic product and, finally, the stock market. Why all? Because money money money, always sunny in the richman’s world.
Dear readers, in this article we want to understand together with you what kind of thing this is and why it can be interesting – this same stock market. We hope that after reading you will be able to delve into the economic news more than before. Or at least discuss it with other people, because communication has now a great importance for all members of modern society. Well, let’s go.
What is it?
As you know, in the world there are many companies that do business, large or small. Some money is needed for a business so that the company can develop, and this money does not fall from the sky, it is given by investors.
At this moment, the stock market is just before us. This is a place where investors have the opportunity to most successfully sell their money by investing it in a particular company through the purchase and sale of securities (which we will talk about later). This is a mechanism somewhat reminiscent of horse racing. Remember these exciting scenes? The last lap, someone goes evenly, someone falls behind, and this is what decides the outcome of the fight. So here,, in the stock market, in exactly the same way, the winning “horse” on which the investor puts money will bring him profit by winning it.
If we continue our analogy with a horse, then try to imagine a pinata – a children’s toy that must be broken to get the sweets hidden inside. So, sweets in a horse are the company’s securities – what it consists of.
Example. Let’s remember what happens when a company goes bankrupt a non-profit enterprise. So what? That’s right, its shares no longer have any value. And why? Because the capital of the company, everything that it owned in monetary terms, was evenly distributed on securities. No money on shares – no company.
Securities confirm various ownership rights and financial obligations. As sweets come in different flavors, securities also have a wide range of different sizes and shapes. These include:
Shares are documents confirming the ownership of a company share. Depending on the rights of the owner, there are:
simple, also called ordinary shares
Preferred shares are named so because the owner has the privilege not to think about how to dispose of them, because his dividends, that is, income paid on shares, does not depend on the company’s profit.
Surrogates of shares, most often depositary receipts. Simply put, this is a receipt for the share itself, which receives a person who, for one reason or another, is not able to purchase the share itself.
Derivatives – in this case, they do not trade in shares as such, but in future profit or loss from their sale. Futures Warrants Stock Options
State shares and shares of enterprises. So the state borrowed money at interest (as if you borrowed a couple of sweets from your friend with an obligation to return them even in a large amount after some time).Deposit and savings certificates
Bills and checks – an obligation at a certain moment to pay the specified amount of money
Before we move on to the very mechanism of the functioning of the market and its participants, we would like to draw your attention to the fact that the market is a risk and a game. To become a participant, of course, you need to have quite a considerable amount of money, but even more than that – considerable SMART BRAIN to take into account all the factors and influences on your “horse” throughout the game.
Participants and how it works
Who is acting on stage? Of the most important, we will name three persons – the investor, broker and issuer. To make it easier, We will again provide you with a figurative example.
Imagine that the issuer is a beautiful girl, very careful about her appearance and trying to look attractive to men. Just like a girl offers her charm, her beauty and charisma to the look of men, in the same way the issuer offers the securities that he issues to investors (the man in the example with the girl).
Our example will decorate the third, but not at all superfluous participant – a broker. This is an intermediary between investor and issuer. As if the man was not sure of his actions and would send his gifts to the girl through a special messenger. Moreover, such a messenger in the market has the right to choose a girl for the owner of the gift.
You can also hear about traders – people who are directly involved in exchange trading (in the example with a girl, all people involved in a love story).
Bulls and bears – and we’re not at the zoo
In slang words, a bull and a bear are usually used to characterize the behavior of a trader.
Bulls are counting on price increases by buying stocks for subsequent sale.
Bears, by contrast, are counting on a fall. They borrow shares to sell at a higher price, and then, when prices fall, buy them back cheaper, and return, get the difference in price. Such “predictions” are called a short position, otherwise the opportunity to make money with the knowledge of where the market is moving.
It is difficult to say where such terms came from. Some believe that this is rooted in history when in England sellers sold the skin of an still-killed bear. Others believe that the bear gives prey, and the bull throws it to the horns.
Well, at the moment, the exchange, the place of trading, is not always a noisy place with people up to the limit, answering phone calls. No, now this is largely electronic space. For all the indices, ups and downs, like a movie, people from all over the world are watching. However, OVER all of these are state oversight and regulatory bodies.
We will not forget about organizations that ensure the functioning of the stock market – depositories (stock repositories), registrars (stock accounting), settlement and clearing networks, and consulting firms.
Stock market indexes
Indexes help stock market participants determine where this market is heading. It is calculated as the ratio of the current share price to the base price selected at some point. Such an index is called the basic one. There is also a chain index – when share’s price relates to the previous price. As a rule, stocks are taken into account in a certain amount (from 10 to 500) of the most liquid companies that means, they would pay for the funds invested in them.
One of the most popular indexes calculated by active trading floors in the USA is the Dow Jones index. The company is the publisher of the influential economic journal Wall Street Journal. This index is associated with the level of economic development of the country, and its collapse, such as in 2008, can affect not only the dollar exchange rate, but also the state of the entire world market. It is calculated simply – the sum of the share prices of the 30 largest US companies is divided by a special indicator, which is published daily on the pages of the Wall Street Journal.