Introduction To Stock Markets
So – first things first – what is a stock market? A stock market is essentially an intangible melee of buying and selling, with transactions constantly whizzing around the ether throughout the trading day. ‘Market’ in this context does not represent the physical place where a stock market is based, but refers to the ‘market’ for securities that are bought and sold (in the sense of the demand for a given series of securities and security indices).
There are stock markets trading round the clock, from Toronto to Tokyo, offering investor the chance to speculate on share prices while providing larger entities with a means of raising the capital they need to fund their operations while acting as a balance against corporate mismanagement insofar as shareholders (frequently disconnected from the management) are responsible for voting on major strategic decisions affecting the businesses they part-own.
An ever-active and essential indicator of economic performance, shrewd investors from all walks of life have made (and lost) millions on market movements, and while would-be traders aspire to join the ranks of the trading elite, it always pays to learn from the mistakes of others, and get to know your markets intimately before starting to play for real.
Stock markets, as the name would imply, generally and primarily trade in corporate stocks. But aside from regular shares, which entitle the bearer to a share in company profits and voting rights on key strategic decisions affecting the business, stock markets also trade a number of other instruments and products.
Perhaps the largest sub-classification of traded instruments is derivatives. Derivatives are contracts which, while having a resale price of their own and classed as an asset for accounting purposes have no direct link to the underlying company.
Rather than a share, which is effectively a bundle of rights in a company, derivatives tend to be rights over these rights – in other words, instruments derived from the underlying rights in a given company (that is, a share or other asset). Examples include futures and options, which give more experienced traders added flexibility and diversity in their portfolio, whilst also providing the key advantage of leverage to vastly accelerate the gains from positive share price movements, and many of these derivatives may also be tradable through your broker’s online platform.
While it is a good idea to bear derivatives in mind, and to get to grips with exactly what they can do for your trading, it remains advisable to ensure you know what you’re doing before meddling with leveraged products, given the hefty downsides involved if you put a foot wrong, and while some traders that are just starting out may be drawn to entering derivatives markets straight off, such a move comes with a serious health warning.