Stock market investments offer one of the best long-term returns, yet understanding all its technical jargon and abbreviations may seem intimidating at first.
The stock market is a network of exchanges that enable investors to purchase and sell shares of public companies, giving their owners ownership stake in its profits.
1. What is a stock?
Stocks are shares of corporations traded publicly on stock exchanges. When you buy stocks, they become your ownership stake in that particular company, giving you ownership and potentially an increased resale price when sold later. Stock prices fluctuate based on various external and internal factors which influence how companies do business – these fluctuations give rise to terms like bull and bear markets.
A share of stock represents a fractional ownership stake in an issuing corporation and stockowners are entitled to receive profits and assets distributed according to their equity percentage. Stocks can be traded across many exchanges both physical and virtual.
2. What is the stock market?
The stock market is an international network of markets where buyers and sellers trade shares of public companies. Equities (also called shares) give owners ownership claims over businesses while giving shareholders access to profit sharing through dividends or price appreciation.
The primary function of the stock market is to enable companies to raise capital through initial public offerings (IPO), which enables them to grow and expand operations. Investors who purchase stocks may benefit by receiving regular dividend payments or seeing an increase in stock price from when they originally bought their stocks.
The stock market provides transparency, liquidity and price discovery through a process called supply and demand. This enables investors and traders to quickly assess how new information impacts on a company’s value.
3. What is a stock exchange?
A stock exchange is a marketplace where investors and traders can buy or sell securities. Companies also use stock markets as an avenue to raise capital through offering shares in an initial public offering (IPO). Stock markets provide individuals with a vehicle for investing their money safely while supporting economic efficiency by giving people control over determining company valuation through supply and demand dynamics.
Exchanges are regulated by government bodies, which set rules regarding which companies can trade on them. While there are also over-the-counter markets where stocks may be traded without supervision from an governing body, one benefit of exchanges over OTC markets is greater liquidity levels.
4. What is a market index?
People are familiar with terms like “the market was up” or “the market was down”, and these are known as stock indexes – these bundle hundreds or thousands of individual stocks with specific parameters into one number to allow users to track Wall Street’s performance more easily.
There are various kinds of stock indexes; some follow the movement of large company stocks while others focus on an industry or region. Investors commonly use market indexes as a way of monitoring financial markets and benchmarking their investments portfolios.
While an index itself cannot be directly purchased or sold, many investors create tradable index funds that closely resemble its performance and offer diversification and protection against inflation.
5. What is a market maker?
When trading financial assets, someone other than yourself stands between your transaction and success – perhaps an experienced market maker or trader.
Liquidity providers ensure stability by continuously purchasing and selling shares or digital assets to keep prices steady, giving market participants access to buyers or sellers at prices similar to previous trades.
Market makers charge a bid/ask spread as their fee for service. Market makers set this price based on supply and demand in an asset market; highly liquid assets in high demand will typically have tighter spreads while those that have lower demand often feature much wider differentials between bid price and ask price – thus earning passively on this difference between ask and bid price.
