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What Is Stock Market? Know More About Stock Market Basics

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Stock market investment is a double-edged sword. Sometimes you are at the helm of earnings and other times you are facing losses. You need to get the investment basics right. We have you covered.

Stock market

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What was your family’s reaction when you first entered the stock market? Well, we know that majority of people whom you consulted told you the same thing.

“It is a deep and dense forest where you will get lost soon.”

You might have also got discouraged after thinking about the complexity & risks. But there you are, reading this blog. Well, it is because somewhere deep in your heart, you still wish to venture into it. You wish to take risks; you wish to learn more, and you wish to invest to earn profits.

The stock market can indeed earn great returns. However, it can also push you into a deep financial crisis if not managed well. Investing in the stock market is exciting. If you have adept financial knowledge and literacy, you are all sorted.

We are here to help you dive deep into the fundamentals of the market. Bon Voyage!

What is a stock?

The stock and share are not the same. People perceive them as the same, but there is a significant difference between the two.

A stock represents part ownership of a company, and a share is the smallest denomination of a company’s stock and once you buy it you become its shareholder.

When you own stocks in some company, then you own a part of the equity, where equity is the ownership value of a company. What does it mean to own some shares of a company? It implies that you own a share of the profit/loss that the company will make in the future.

What is the stock market?

A stock market is a marketplace where issuing, borrowing, selling, and purchasing of stocks take place Any organization can sell stocks of their company to raise money. And anyone can buy these stocks as shares. The securities which are listed in the stock market include stocks, exchange-traded funds, and other kinds of securities.

Why does a company issue share?

Every company needs investments or money to speed up its growth, scale up the operation, or expand its business horizon. When people buy these shares, they fuel the company’s growth and expansion ambitions.

Company shares
Source: Pexels

Who decides the cost of the stocks?

No organization or person decides the cost of the stock. Then how are the prices decided? The market forces, the seller, and the buyer determine the value of the stock.

Every time a seller sells a stock, the stock exchange records the selling price. If a buyer buys the stock at a new price, the stock exchange registers this price as the new market price. The market price of a stock is the price at which a buyer and seller agree to trade in the stock.

What are the benefits of investing in the stock market?

Investing in the stock market shares increases the value of your portfolio. But there are other benefits too. Here are some of the prominent benefits of investing in the stock market.

Diversification: You can mitigate the business risk in the stock market by diversification. You can invest in a portfolio of equities diversified across different companies, sectors, or industries.

For example, you can keep 5 stocks in your portfolio rather than keeping one. Even if one business is not performing well, the other 4 companies can balance out your losses.

Liquidity: Earlier, the traders exchanged shares using a paper-based mechanism was time-consuming. Electronic Stock Exchanges offer a mechanism for the buyer and seller to exchange quickly. This mechanism offers you full control over your trading.

Liquidity Risk: If the company you have invested in does not have financial stability (solvency), then it might not pay you the return, cut dividends, and in the worst scenario, may go bankrupt. There is the liquidity risk involved in the shares of the company.

Capital gain: When the company earns more, the investor gains more profit. If the company does well, the stock prices go up, thus benefiting the investor. Companies may want to share the excess profit with the shareholders by announcing dividends.

Dividend: Some companies pay you a part of their profits or a fee at a regular interval. This way you get a predictable flow of income over and above your fixed income.

Investing in stock market
Source: Pexels

What are the risks associated with the stock market?

There are a few inherent risks associated with the stock market investment. At one point the prices of the stocks might go sky-high, on the other, they might even drop to their lowest levels. Here are some of the major risks associated with the stock market:

Financial risk: Financial risks involve financial losses to the firm. Financial risks occur because of uncertainty in the financial market. The volatility of stock prices, currency exchange rates, and interest rates might affect your investments. You may be at risk of losing your money if the company does not accommodate these volatilities well. Such a company has a liquidity risk.

Market risk: Market risks involve volatility risks. There is no guarantee how the prices of the stocks would behave. These prices may rise or fall sharply and continuously. Deciding on the selling or buying price can be a hard choice in such cases.

Emotional risk: Actions triggered by fear of losing or greed to earn more can risk your investment in the stock market. Sometimes, you buy or sell stocks by making an emotional decision and not based on an incisive assessment. This may lead to heavy losses.

Liquidity risk: Trading in the stock market & not being able to sell or exchange stocks or shares easily is called a liquidity crisis. It involves liquidity risk when you cannot sell the stocks you hold.

Bottom line

The road leading to success in stock market investments has many twists and turns. If you want to invest in the stock market, do not rush. First, understand the basics of investing in the stock market.

You learn to be diligent by setting realistic goals. It is always good to consult a stock market expert. This helps you get a better understanding of stock market investments.

You should acknowledge that benefits and risks are a part of the stock market investment. The stock market may seem harsh, but it brings significant benefits to the right investors.

Mutual Fund schemes invest heavily in the stock market. You need to know about investing in mutual funds to grow your money faster. Have you found out everything you need to know about mutual funds? If not, read ‘What are mutual funds?’ to get deeper insights into mutual fund investment.

References: 
https://www.cibc.com/en/student/student-life/all-about-stocks.html
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