What is the Stockmarket and What Does it Do?
Possible, you are planning to start your personal investing on the stockmarket. First, you really need to comprehend how the stockmarket functions before you can tell when to invest and in which type of shares; so do not just jump straight into the market. Below I will go over the main functions of the stockmarket.
The 2 Core Roles of the Stockmarket
As you will see, there are 2 core and totally different functions that the stockmarket performs. The first is called the primary market and the other is the secondary market.
Primary Market
In the primary market, companies can issue new stocks that are offered to the original shareholders or to the public. To understand the primary market - think of the resemblance to a new car dealer. The money you pay the dealer for your new car goes to the manufacturer less the dealer’s profit. A similar scenario goes on in the primary market; the money raised by the new stocks goes to the company minus any costs.
Companies usually offer new shares for expansion; like constructing a new factory, to develop a new product line, or to refinance debt. This can be explained as the raising of capital by sharing the risk in exchange for possible higher profits.
Secondary Markets
In the secondary market, the public can sell and buy stocks and shares. With the car analogy, we now consider a second hand car dealer. When you purchase a second hand car from the dealer, none of that money goes to the manufacturer of the car. Instead, the second hand car dealer has bought a used car from the owner and then sells it on to a new owner.
The secondary market therefore works by bringing together the buyers and the sellers. The same that you are free to buy and sell a car, you are also free to buy and sell shares when you want. This is the liquidity of the markets or the way to turn assets into cash. In fact, with no secondary market there would be no primary market.
What Causes the Markets to Move?
Essentially, the reasons that markets move can be boiled down to either the rational or the irrational factors. It is, of course, a lot more intricate than that. However, there are only three key reasons for the markets to move and these are the irrational herd mentality of the investors (swings of pessimism to optimism regarding risks), the fundamental factors (for example inflation, depression or government policies), and the technical factors (for example trends in investing or the popularity of an industry or product.)
Knowing what causes the markets to move are important factors to take into consideration both for short term and long term investing. You must take into consideration all of the factors all together and not just individual factors if you want to minimize your risks. Learn and gain knowledge about the stockmarket before jumping in and you may make a better return on investment than merely keeping your money in a fixed interest security or savings account.
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