What Is The Stock Market? [Explained For Beginners]

Welcome to our stock trading course!

So, nearly every person in the world has heard about the stock market. I mean, you’ve probably watched a famous stock trading movie, read an article about the stock market, found a post or advertisement on a social media platform, or heard a story or a word of wisdom about the stock market from a friend or family member.

But what is the stock market? How does it really work? Why is it there, and what’s the purpose of a stock exchange? I mean, it’s not there to make people rich, right? There’s a reason why people have come up with this idea to create stock exchanges and why these marketplaces have survived for nearly five centuries.

So, let’s start exploring this topic – the stock market!!!

First, What is the Stock Market?

assets. At the time, the Dutch East India Company was the first publicly traded company on the Amsterdam trading market (today, the Exchange is called the Euronext Exchange). 

The concept of the stock market is pretty simple. Companies sell shares to the public through a process called Initial Public Offering (IPO) to raise funds and increase the company’s capital. By doing so, they can grow and expand their businesses.

So, imagine you have founded a company, you have one shop and a stable income. But you want to grow your business. So, you can sell shares of your company to the public, and this way, you raise capital. Now, you can open another shop or invest money in other products or services. That’s the basic idea of the stock market for companies and organizations.

On the other hand, investors use the stock market to buy and sell securities to grow their wealth by investing in the right companies. When investors purchase a stock, they become part-owners of the company. They essentially buy their share in the organization while providing it with the capital to put into the business. They expect to buy the stock at a low price and sell it with a profit.

Where Can You Trade Stock?

So, where does it all happen? There are stock markets spread across the world, with some of the biggest ones located in New York (New York Stock Exchange), London (London Stock Exchange), Shanghai (Shanghai Stock Exchange), Hong Kong (Hong Kong Stock Exchange), Tokyo (Japan Exchange Group).

However, it all depends on where you’re from. Usually, your country will have an exchange dedicated to trading stocks and other securities like ETFs, bonds, mutual funds, options, and shares. But more on that later on. For now – for a full list of stock markets worldwide, please click here.

Additionally, other ways exist to access the stock market and trade stocks. One way is to trade CFDs or contracts for differences. These are basic types of assets, including shares that allow you to trade the price movement, but without owning the asset. So, when you trade stock CFDs, you are entering an agreement with another party to speculate on the difference in value between the time you entered the contract and sold it.

Regardless of the method, you’ll choose, you must find a licensed stock broker to be able to get access to the stock market and trade shares. That’s the only way it works. Stockbrokers are the only ones authorized to enable traders the buying and selling of financial assets.

Why Do Companies Go Public?

You can think of it this way. Every company has its owner. For small companies, this usually means one single owner, whilst large companies that deal with Stocks have more owners. Now, why would one want their company to have more owners?

It’s simple. To expand.

And to expand, companies need MONEY. Money from people (or investors if you like) just like you, me, my girlfriend, my wife, my dog, and anyone who has the capital to invest really. Without access to money from investors, businesses would be more constrained in the projects they can take on and, therefore, unable to truly capitalize on the equity in their company.

Now, once you invest in a company, the money can be used for various things such as inventing new products, building new factories, expanding to new countries, or hiring more people. With that being said, in the grand scheme of things, you, as an investor, don’t really care how the companies use your money as long as it makes you profitable in the end, right?

How Does The Stock Market Work?

Okay, so now that you know that a stock market is a place where firms can raise capital by selling shares to the public and buyers and sellers negotiate prices and make trades, we can get to the technical part.

Let’s say a company decides to go public and list its shares on the local stock market. This is called an initial public offering (IPO). A company must meet some requirements to hold an IPO and register its company on any stock exchange. Once everything is approved, they set a date and go public.

From that point on, investors can buy and sell their shares to others, and prices will fluctuate depending on the supply and demand of the specific stock. For example, if the company performs well and reports profits or expectations for profits, the value of the stock will rise. But if the company is not doing so well, then the price will fall.

For trades to happen, a buyer and seller must agree on the amount they are willing to pay or sell their share for. These days, this all happens online, with prices often automatically calculated, unlike traditional marketplaces where you’d need to be physically present to make bids.

Summary

Well, knowing the basics of how the stock market works can be crucial for you and may help you become a better trader. Unfortunately, covering this topic requires more than just one lesson. The stock market is a broad concept that can be described at different levels. 

So, in the following lessons, we will explore who participates in the Stock market, where you can trade stocks and the different trading hours of stock exchanges. What else? We suggest you visit our top trading book suggestions and maybe watch a good film from our list of the best trading and stock market movies.