You have probably heard the terms ‘share dealing’ or ‘stock trading’, but what do these really mean? We’re here to teach you the stock market basics, to question what you thought you knew about stock market trading and what this could mean for you.
Ultimately, stocks are shares issued by corporations and owned by stockholders. Sometimes referred to as ‘equity’ or ‘equities’, stocks are issued by companies looking to raise capital in order to grow a business or to undertake an expansion project. A company will do this by ‘going public’ in the form of making an initial public offering (IPO).
A shareholder is the owner of shares in a public company; investing in company stock comes with particular rights which include receiving a dividend (company profits) as well as rights in shareholder meetings. There is a distinction, however, although shareholders own shares issued by the corporation, the corporation owns the assets – shareholders are not able to do as they please with a corporation or its assets.
Owning stocks in a company gives you the right to vote in shareholder meetings, offering you some indirect power, particularly if the company buys another company. You are entitled to receive dividends and are free to sell your shares elsewhere.
It is the second (profits) that is typically of most interest, as this represents the foundation of a stock’s value. The more shares you own the larger proportion of the profits you get back.
Some companies may not pay out dividends but instead will reinvest profits back into the expansion of the company, however these retained earnings are then reflected in the value of the stock.
The stock market is a venue where buyers and sellers of shares meet and determine the price of a trade. Stock markets are secondary markets where current owners of deal in shares with potential buyers. Once a company completes it IPO, its shares become public and can then be traded on this stock market.
The price of shares on a stock market can be set in various ways, but commonly it is done through an auction-style process where buyers and sellers place bids and offers to buy or sell. Prices will change to reflect supply and demand – when there are more willing buyers than sellers, the price of a stock will go up (and visa versa).
For the stock market to work there must be both buyers and sellers, who are trading existing, previously issued shares offered by one investor and bought by another. There is no direct impact on the company being traded during this process.
Isn’t stock market trading equivalent to gambling? It is true that there is both money and risk involved in both, investing is based on risk and reward. In gambling, a player cannot change the probability of a bet, whereas with proper research an investor can make an informed judgement of any risk involved.
Don’t I need to be rich to trade stocks? It is a common misconception that you need a lot of money to make money, however in share dealing this isn’t true. With effective research and a little bit of cash in the bank anyone can start trading in stocks.
Surely investing on your own is very risky? Any risk to investment comes from not knowing what you’re doing. As with anything, properly educating yourself is the key to reducing risk and increasing reward.
Technology and online trading platforms like Mintbroker have made trading stocks easier for everyone! Electronic trading has dramatically reduced the commissions of most people, there are learning resources everywhere and the playing field is now more level than ever. This means you can be a trader too! Get started with MintBroker today!