Many people have misconceptions about how the stock market works because there have been many myths and legends around it. However, its operation is simpler than you think. In this article we will learn what the stock market is and how it works.
What is the stock market and what are its functions?
In the same way that if we need to buy shoes, we go to the shoe store, or if we need to buy bread, we go to the bakery, there are big “stores”, where the financial assets are bought and sold. These “stores” are the so-called stock exchanges.
The stock exchange is a private organization that offers the necessary conditions for companies that need capital and people and/or companies that have capital, to carry out transactions of purchase and sale of securities, such as shares of companies, public and private sector bonds, certificates or participation bonds, among other investment instruments.
Thus, the purpose of stock exchanges is to provide the agents who intervene with a suitable place to carry out their transactions, where buyers and sellers meet, giving rise to the formation of prices of public offer securities, according to supply and demand.
The main functions of the stock exchange are the following:
It contributes to the development of the capital market, allowing intermediaries and clients to trade securities and financial instruments.
It facilitates the flow of savings and investment in the stock market.
Performs the primary placement of stock and bond market instruments.
Provides a secondary market for the trading of financial instruments.
Promotes market regulation, favouring free pricing and transparency in operations.
Provides services, systems and infrastructures for the stock market.
To understand how the stock market works, it is important to understand the role of each of the agents involved in it:
Issuers: these are the entities that issue the securities that are traded on the stock exchange.
Regulators: these are the institutions that oversee the proper functioning of the stock market and dictate rules for its control.
Intermediaries: through which the investor can buy and/or sell financial instruments on the stock exchange. There are two types of intermediaries:
Stock market brokers
Stock exchange agents
Investors: are those who invest their money in securities in order to obtain a return in return. They can be local or foreign and can be institutional (banks, insurance companies, investment funds, pension funds) or non-institutional (natural or legal persons).
How does the exchange work?
The stock exchange operates under a market dynamic, where the interaction between bidders and demanders influences the price behavior. Thus, if a stock is in high demand, its price tends to go up; while if few people are interested in buying that stock, its price tends to go down.
In the stock market, the price of assets will also be influenced by the information available about the issuing company, the information about its activities and results.
Securities trading between seller and buyer can only be done through an intermediary (broker or agent), which is responsible for carrying out the purchase and sale transactions. It is important to note that intermediaries charge a commission for each transaction (operation) they make on the exchange.
All offers on the stock exchange are public. The individual agent or company can know the characteristics of the offer and the economic situation of the company that placed it on the stock exchange.
Is it a good idea to invest on the stock exchange?
One thing you should always keep in mind is that easy money doesn’t exist, the stories of people who became millionaires overnight are almost never real, unless you are one of the lucky ones to win the lottery jackpot. With this in mind, is it a good idea to invest in the stock market?
Let’s see: you’re doing well, every month you have some money left over, so you want to invest in something. If you’re looking for a long term business, but with good returns, the stock market is an option to consider, although there’s always the possibility of failing or losing money if we don’t do things the way they should be done.
According to our experience, the first thing to do if you want to invest on the stock market, is to look for advice from specialists. Experts who can gather a range of options that fit your needs and what you expect to get with your investment, always keeping in mind that if you’re going to invest in this, it’s because you don’t need that money in the short term.
There are many ways to invest in the stock market, none is perfect and all have advantages and disadvantages, the ideal is to invest in all the options that the market offers you, since all are compatible with each other, this is the good of this type of investment, you should not box yourself in one direction.
Answering the initial question in a more summarized way, investing in the stock market is an idea to be considered, as long as you receive the advice of specialists and educate yourself financially to understand that the market can have ups and downs, moreover, never forgetting that it is something that works in the long term.