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What is the Stock Market
The stock market is a place where the shares of companies that are publicly owned can be bought and sold either OTC (Over-The-Counter) or through centralized exchanges. The equity market, as it is also known by, has established itself as a free-market economy, in that it offers companies the ability to access capital in exchange for offering interested outside parties a portion in the ownership of the company.
The stock market or equity market offers opportunity to investors to increase their income without the high risk of entering into their own businesses with high overheads and start-up costs. On the other hand, selling of stocks did help the companies themselves expand exponentially. When you purchase a company’s shares it is generally associated with an increase in the company’s worth. Therefore, trading on the stock or equity markets can be a win-win for both investor and company.
There is a negative risk however small or large depending on the amount of stock bought, that one can lose money in a forex trading environment. If the stocks traders hold from the company lose value, then so does the trader. If he decides to sell his stocks when the value is lower, he will sell at a loss.
How is the Stock Market Broken Down?
There are various segments of the stock market to consider when entering into a purchase or interest in the shares of a particular public company.
There are three sections that the stock market can be divided into: the primary market, the secondary market and the OTC or Over the Counter market.
- Primary Stock Market
The market where securities are initially created. This is an open stock market where a company’s shares are offered and sold for the first time and directly from the company issuing them. Having precedence as a primary listed company that lends to a company’s credibility and therefore opens doors to investors being more predisposed to purchasing shares in that company. The primary market is dominated by the larger investment institutes such as investment banks, hedge funds, etc.
- Secondary Stock Market
In the secondary market investors trade these stocks themselves and the company that had previously sold the stock initially is not a direct participant in the transaction. Selling and buying of shares that are already owned by investors is the typical idea of the stock market, even though stocks are also sold on the primary market as this is the stage they are initially issued from.
- OTC Stock Market
The OTC market, also known in trading as the off-exchange, is an option for investors to take part in the purchasing and selling of stock from a decentralized market. Decentralized is where a transaction of buying or selling will take place between two parties, such as the trader and the forex broker. Transactions are generally done electronically either telephonically, through e-mail or via a trading platform, like the MetaTrader 5 OR MetaTrader 4, and not through the local stock exchange. The OTC market is usually for stocks and stock prices not commonly listed on the stock exchange.
The Stock Exchange
The traditional medium where stocks or shares, bonds and other securities are exchanged between a stock broker and a trader. The stock exchange, also known as bourse, can provide facilities for the issue and redemption of financial instruments with the inclusion of the payment of income and dividends. Other assets listed on the stock exchange can include derivatives, unity trusts, bonds and pooled investment products.
In the past a stock exchange was a physical place where traders would exchange company stock through an auction or open outcry process. The New York Stock Exchange (NYSE) is the world’s largest stock exchange, and even though some parts of it have been migrated to an electronic exchange, it is still primarily an auction exchange. There are traders physically present on the floor of the NYSE, who are known as market makers. These market makers are each specialists in a single stock and they control the order flow of that stock. In the 21st century many stock exchanges have gone digital and exist only as part of a computer network. The Nasdaq is like this, which is somewhat ironic since the Nasdaq is also well known as an exchange for technology stocks.
The main Stock Exchanges
|Local Stock Exchange||Region||Public Listing|
|New York Stock Exchange||New York, United States of America|
|NASDAQ||New York, United States of America|
|London Stock Exchange||London, England||
|Borsa Italiana||Milan, Italy||
|Japan Exchange Group||Tokyo, Japan|
|Hong Kong||Central, Hong Kong|
|Frankfurt Exchange||Frankfurt, Hesse, Germany||
|Shanghai stock exchange||Shanghai, China||
As most public companies make use of their local stock exchanges as a platform to publicly list their company for capital gains these are a selected few that are also offered by AvaTrade South Africa, stated with the region you can find them in. These are national exchanges that act as the secondary markets.
Investing in stock market
Besides the obvious, investing in a certain company’s stocks and trading, there are a number of alternative ways that can be conducted when trading to establishing a strategy, with the possibility of making a profit with a company’s shares as an investment choice.
- Value Investing
This is a simple investment strategy, where certain stocks that are selected trade for a lesser amount of their inherent value. These types of investors (value investors) actively seek out undervalued stocks as they believe they will see returns on these listings. This type of investing does not require you to have a background in finance, however, an understanding of trading and basic finance knowledge is recommended when entering into any trading or purchasing of stocks.
- Price-Earnings Ratio
P/E Ratio as it is better known in short, is defined as a company’s measure on its current share price relative to its per-share earnings. This is how they calculate the price-earnings ratio: By taking the stock price of the company and dividing it by is earnings per share (EPS) = market value per share. The P/E ratio is a dollar amount that a trader can expect to invest in a company in order to receive one dollar of that company’s earnings.
- Dividend paying stock
Dividends are a way that companies reward shareholders for owning a stock in their company. Dividends are generally paid in cash on a quarterly basis and can become a steady payment if the investment taken is fruitful, while this can develop another opportunity in itself to purchase additional stocks. This is a longer term investment with a lower risk, as these companies are generally more financially stable and overtime dividends rise and they are committed to dividend payments on their companies’ stocks.
- Growth Investing
Growth investing focuses on appreciation of capital. Investors who follow a growth strategy look for companies with above average growth prospects to invest in. They often purchase shares in these high growth companies even when traditional metrics like price-to-earnings and price-to-book ratios make the stock look expensive. Technology and biotechnology stocks tend to dominate the growth investing strategy.
Stock Trader Styles
- Fundamental Trader
A fundamental stock trader focuses on the financials and news-worthy events of the various companies to determine what stocks are best to buy and when they should buy. Fundamental traders typically dig deep into the financial condition of a company to study its strengths and weaknesses before deciding whether or not to buy. Fundamental trading can be looked at from both short-term and long-term perspectives, but it tends to be a long-term buy-and-hold type strategy.
- Noise Trader
Noise trading is a type of short-term trading where decisions are not based on any study of fundamental data. Instead traders react to current trends in the economy and sector, typically placing short-term trades for quick profits. Technical analysis might be used to provide some insight into the trade, but typically this is a quick and shallow examination. Noise traders have a tendency to over-react to news and economic data, and they can also have poor timing. It’s interesting to note that the majority of traders are actually noise traders.
- Sentiment Trader
A sentiment trader looks to identify and participate in market trends. Rather than looking for good securities that have been overlooked by the market they try to find the securities that are favoured and benefit from the momentum in the stock. This makes momentum traders a type of sentiment trader. Sentiment traders will combine fundamental and technical analysis to locate the best trades at any time. Other sentiment trader types include swing traders and contrarian traders who find indicators that are showing exceedingly positive or negative sentiment and then look for signs of a market reversal.
- Market Timer
Market timers use their analysis to try and predict which direction (up or down) a stock will move, and then attempt to profit from their analysis. Market timers generally use economic data and technical indicators heavily in their analysis of stock movement. Short-term traders are often in the market timer classification.
These are the most common types of stock traders, but the list isn’t exhaustive. And in most cases traders are a combination of types, depending on their personality. Maybe you see yourself in these trader types, or maybe none fit you. That’s ok because there are many trading strategies that can be used to meet your trading goals. Continue practicing your trading and it will soon become apparent which stock trading strategies best suit your personality.
Shares Trading Types
- Swing Trading
Swing trading has become a very popular way to trade in the short-term when trading on stocks and options. Lasting less than one day generally, swing trader’s positions can last up to two weeks. When swing trading, the goal is to identify the overall trend and ‘swing in’ and capture the gains while the markets is on a trend. The use of the technical analysis is advantageous when swing trading to monitor quick market changes as and when they happen.
- Day Trading
Speculating on a buy or a sell of a particular share, commodity, index or currency that takes place strictly only on the same day. Positions can be opened the second the markets open or throughout the day however all positions must be closed before the market closes for that trading day. Traders that use this trading strategy are known as day traders.
Scalping is an extremely fast trading style that looks to take advantage of very short-term price moves that last anywhere from several minutes down to several seconds. The scalper only needs to make a small profit on each trade before they move on, but they might place hundreds of trades during a single trading session. Limit orders and stops are frequently used to help manage the huge number of entries and exits being made. Scalpers do not use any formal technical analysis, but are usually very familiar with the major technical patterns and will look to identify them on 1 to 5 minute tick charts.
- Position Trading
Position trading is a long-term type of trading where positions are held for months or even years. The position trader ignores the short-term fluctuations of the market and focuses instead on the long-term. Position trading is the base opposite of day trading since it tries to make profits over months and years rather than on the short-term fluctuations of the markets. In most cases a position trader will use weekly or monthly charts to determine the trend in a stock and locate a good entry. Those who use CFDs in their position trading will face rollover charges for holding positions open overnight.
Depending on the type of trader you are be it longer or shorter-term, any trading in the short term will have more profit as well as risk of loss potential. It is fast and trades are entered into and exited in a short period of time.
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Stock Market main FAQs
What is stock market volatility?
Whenever you are trying for a reward, like monetary profits, there are always associated risks. One of the risks in the stock market is that prices will move against your position, causing a loss rather than a profit. This risk is magnified by volatility in the stock market, which is the wide swings often seen, particularly in individual stock prices following news or earnings. Over time volatility evens out and so the key to defeating volatility is to remain in the market for a long period of time and ride out the ups and downs.
Where is the stock market located?
Different markets are located in different places, and in some instances, there is no physical location for the market or index. For example, the NYSE is physically located in New York City at 11 Wall Street and you can actually go there and see the floor traders. By contrast the Nasdaq is fully electronic and while it has its headquarters in New York City, there is no trading floor where you can go to see the open outcry form of trading. Nearly every country in the world has one or more stock markets, and most have physical locations, but have been increasingly migrating towards electronic trade.
How are prices set at the stock market?
Most stock markets work through an auction process, with buyers placing bids for the price they are willing to pay for a stock, and sellers setting an ask price for how much they are willing to sell for. When the two prices meet a trade is conducted and shares exchange hands. In the past all of these trades were made on stock market floors, using an open outcry system where the market makers would yell, or cry out, the prices at which shares could be bought or sold. That has evolved into an electronic auction system, which is good since stock markets today consist of millions of individuals, all of whom have their own ideas of what a stock is worth.