What do stocks mean?
Before we understand how stock market works, we nee to undestand what do stock means. The units of ownership in one or more companies are called “shares” or “share certificates.” A shareholder is a company owner who gets dividends and voting rights if the company grants them. Both words are often used to mean the same thing. In English, you can also talk about “stocks,” “shares,” and “equities,” which are different in some technical ways. We tell you what the English words mean:
- Most of the time, the word “stocks” refers to parts of ownership in different companies. For example, in English, you say “stocks” when you own shares of Amazon and Microsoft.
- Most of the time, “shares” mean parts of a company’s property. Use the word “shares” if you want to make it clear that you own ten Amazon shares.
- “Equity” is the word for how much of a company someone owns. For example, if a company had 10,000 shares and you owned 1,000 of them, you could say that you owned 10% of the company.
How stock market works
When you own shares of a company, you have a direct stake in how well it does. They will become more valuable if the company does well and less valuable if it does badly. Stock exchanges are places where shares of companies that are listed can be bought and sold. A company can go public in a number of ways, but the most common and traditional way is for the company to go public (IPO).
How to buy and sell shares: spend or trade?
You can get into stocks in two ways: by investing or by trading stocks in derivatives. We’ll look at the differences between these two options in more depth in the next section. Please note that you trade stocks with us and do not invest in them. This means that you can bet on how the price of a stock will change without ever actually owning a share. This is possible with the CFDs and barrier options we offer.
Investing in stocks
The investment method is the better-known of these two methods. When you buy shares, you take direct ownership of the assets. People who want to be in it for the long haul and hope that the company’s shares will go up in value like to make investments. Because if a company grows and becomes more valuable, the price of its shares is likely to go up as well.
In this case, being a shareholder means that you get more money when you sell your shares for more than you paid for them. But since the value of investments can go up or down, you may get back less than you put in if the share price of the company has gone down when you close your position.
When you trade stocks, you bet on the price movements of shares without actually owning them. People who want to take a short-term position in a company’s share price, perhaps when the market is more volatile or busy, usually choose to trade. If you decide to trade, you can “buy” (or “position yourself long”) if you think prices will go up or “sell” (or “position yourself short”) if you think prices will go down. You can trade stocks with derivatives like CFDs and barriers, which both give you more money than you put in.
When you use leveraged derivatives like CFDs or barriers to trade stocks, you only need a small portion of your total market exposure to open a position. For CFDs, this is done by putting down a deposit called “margin,” while for barriers, it is part of the premium. Please keep in mind that leverage can make your profits and losses bigger. If you don’t have a good plan for managing risks, these things can happen quickly.
Why do companies go public?
When a company goes public on the stock exchange, it sells its shares to institutional investors or private investors in order to get money. Institutional investors are companies like investment funds or banks. Private investors, on the other hand, are just regular people.
Most companies are listed on a stock exchange in their own country. In US, for example, New York Stock Exchange. But it is becoming more and more common for companies to have more than one foreign direct investment quote. Companies often have to go through an IPO to get on a stock exchange. .
What is the value of a share?
Different stocks have different values. This depends on whether you look at the fair value or the market value. Fair value is a share’s eigenvalue, which is based on objective data and facts about a company. Market value is the amount that people are willing to pay for a share right now.
Most of the time, the fair value of a share is much lower than its market value. This is because the market price is heavily affected by demand, which does not always reflect a stock’s fundamentals. When the demand for a stock goes up but the supply stays the same, the price of the stock goes up because investors are willing to pay more.
Why trade stocks?
Investors often choose stock trading over other types of investments for a number of reasons. One of the most important things is that you can take both short and long positions when you trade stocks with derivatives. This gives you the chance to bet on both markets going up and markets going down.
This is because when you trade CFDs or barriers, you don’t own the underlying shares. But you should be aware that short positions are a risky way to trade. Before you hurt yourself, you should make sure you understand how it works inside and out.
Investing, on the other hand, only lets you hold on to shares of a company for a long time. This means that in most cases, you will only make money if the value of the shares goes up. But you can also get dividend payments, even if the share price of the company goes down. You can decide if you want to use the money from these dividends as income or reinvest it to get the benefits of compound interest.
Whether you want to invest in stocks or trade on them depends on whether you want a long-term or short-term commitment.
As was already said, leverage effects are a big reason why many investors choose to trade. This is a good thing about trading stocks because it means you need less money to start a position. But even though leverage can be helpful, it also comes with a lot of risks. This is because any gain or loss is based on the full exposure of the position, not just the amount needed to open the position.
What are the dangers of buying and selling stocks?
Trading shares comes with a number of big risks, such as the systematic risk, the special risk of a single company, the risk of bigger losses because of leverage, and the risk that you could lose as much as you want when you buy a share short.
Systemic risk and business risks
When investors or traders buy a lot of a stock, they take on these two risks. Systemic risk is the risk that a business faces because it is part of the economy as a whole. For example, if the economy is in bad shape, it’s likely that a company will have less demand for its goods or services, no matter how well it is run. “Idiosyncratic risk” is the name for the company’s risk. This is the risk that each company faces because it has its own unique circumstances and problems.
Traders can open a position by putting down only a small part of their total exposure when they use leverage. Even though your initial investment is less than it would be if you had to pay the whole amount up front, your potential gains and losses can be bigger.
Before you start trading leveraged derivatives, you should think about whether you understand how leverage works and whether you can afford to take the high risk of losing your money.
When you open a trade for a short position, you sell the derivative financial instrument at the current bid rate. In the end, you buy back the derivative to close the trade. If your prediction is right and the market price goes down, which means you can buy the derivative back at a lower price, you will make money. But if the price goes up and you buy it back for more than you paid for it the first time, you lose money.
Short sales with derivatives can be a good way to make money off of stocks whose prices are going down. But it is a high-risk way to trade because stock prices can, in theory, keep going up forever. This means that if the market goes against you and you are short, you can lose as much as you want.
There are tools that help traders keep their risks in check. For example, a stop-loss order closes your position when the market moves against you, while a limit order closes a trade after the market has moved a certain amount in your favor.