The stock market is an important platform for corporate financing and investor investment. It provides companies with financing channels and provides investors with opportunities to participate in corporate growth. Stocks are one of the best ways to create wealth. Historical data shows that stocks have outperformed almost any other major asset class over a long period of time.
So do you know how the stock market works? Do you know how to buy and sell stocks? If your answer is "no," you 're not alone . The stock market can seem very complicated. However , the basics of the stock market aren't as complicated as you might think .
Next, this article will introduce in detail the definition of the stock market, how it operates, and how investors can participate in it , providing investors with professional market knowledge.
1. What is the stock market?
The stock market is a place where stocks and other securities are bought and sold. Stocks are certificates issued by companies that represent shareholders' ownership of the company, and the stock market is where investors buy and sell these shares. In short, the stock market is a capital market where investors can participate in the growth of companies and the economy by buying and selling stocks.
The stock market is mainly divided into two parts:
Primary Market: Also known as the issuance market, it is the transaction conducted when a company issues shares for the first time (through an initial public offering, IPO). Companies raise funds by issuing shares in the primary market to provide funds for expanding business or repaying debts.
Secondary Market: Here, investors buy and sell stocks. Transactions in the secondary market do not directly affect the company's capital inflow, but reflect the market's view of the company's future prospects through changes in stock prices.
2. Functions of the Stock Market
The stock market performs many functions, not just a place for buying and selling stocks. It plays a key role in economic and corporate development, which is reflected in the following aspects:
Financing function : The stock market provides a channel for companies to raise funds. In the primary market, companies raise funds by issuing new shares to finance expansion, research and development, or other business activities. This provides financial support for the growth and development of enterprises.
Liquidity function : The stock market provides liquidity for stocks, allowing investors to easily buy and sell stocks when needed. Liquidity allows investors to quickly cash out assets and reduce investment risks.
Price discovery function : The stock market reflects the market value of stocks through buying and selling transactions. The price of stocks is determined by the market supply and demand relationship. The price changes of stocks reflect the market's judgment on factors such as the company's profitability, management quality, and industry prospects.
Risk sharing function : The stock market provides investors with the opportunity to diversify their risks. By purchasing stocks of different companies and industries, investors can diversify the risks of their portfolios and reduce the impact of adverse changes in a single company or industry on investors.
Investment opportunities : The stock market provides investors with opportunities to participate in corporate development and enjoy the dividends of corporate growth. Long-term investors can get returns through dividends and stock price appreciation.
3. How does the stock market work?
The workings of the stock market are very complex, but can be understood through the following key links:
Exchanges and OTC Markets
Stocks are typically traded through two main channels: exchanges and the over-the-counter (OTC) market.
Exchanges: Such as the New York Stock Exchange (NYSE), NASDAQ, etc., where investors trade through brokers. Exchanges provide an open and transparent market for stock trading, and all trading information is made public.
OTC market: OTC market refers to stock trading without a fixed trading venue, usually conducted directly through brokers or dealers. OTC market trading flexibility is greater, but transparency is lower.
Order Book and Matching System
Trading in the stock market is done through an order book and matching system. When an investor wants to buy a stock, they submit a buy order, and the seller submits a sell order. The exchange's matching system matches these orders, and when the prices of the buyer and seller match, the transaction is completed. In this process, the supply and demand relationship in the market determines the price of the stock.
Market Makers and Liquidity Providers
Market makers are intermediaries in the market who ensure market liquidity by providing buy and sell quotes. Market makers play a key role in the stock market, especially when trading volume is low or stock liquidity is poor, as they provide a counterparty to buy and sell so that stocks can be traded smoothly.
Price Fluctuations
Stock prices are determined by market supply and demand. If there is a large demand for buying a stock, the price will rise; conversely, if there is a large demand for selling, the price will fall. Price fluctuations are affected by many factors, including company financial reports, macroeconomic data, industry trends, political factors, etc.
Brokers and Investors
Most investors trade in the stock market through brokers. Brokers act as intermediaries for buying and selling stocks by providing investors with trading platforms, market analysis, and order execution services. Investors participate in the growth of companies and the economy by purchasing stocks, but they also face market risks.
IV. Major participants in the stock market
There are many types of participants in the stock market, and their behavior has a significant impact on the operation of the market. The main participants include:
company
Companies are suppliers to the stock market. They raise capital by issuing shares and reward shareholders by paying dividends or through share price appreciation.
investor
Investors are the demand side of the market and are mainly divided into two categories:
Institutional investors: such as fund companies, insurance companies, pension funds, investment banks, etc., usually manage large amounts of funds and make large-scale investments through the stock market.
Retail investors: Individual investors who allocate and increase their assets through the stock market and participate in stock investments in single or multiple companies.
Exchanges and Platforms
Stock exchanges and trading platforms provide venues and technical support for trading stocks. They ensure the transparency and compliance of transactions and provide an open and fair trading environment for market participants.
Regulatory agencies
Financial regulatory agencies in various countries (such as the U.S. Securities and Exchange Commission (SEC) and the China Securities Regulatory Commission) are responsible for supervising stock market trading activities, ensuring market fairness and transparency, and preventing insider trading, market manipulation and other unfair practices.
5. How to invest in the stock market?
For investors, entering the stock market and investing usually requires the following steps:
Select a securities company
In stock trading, investors cannot trade directly on the stock exchange and need to rely on brokers as a bridge. Investors need to open investment accounts through securities companies or online investment platforms. Securities companies provide trading platforms, market analysis tools, and order execution services.
Select investment products
Investors can choose to invest in individual stocks or choose to invest in stock funds or ETFs. Stock funds and ETFs usually hold multiple stocks, providing better diversified investment opportunities.
Research and Analysis
Before investing, investors need to do research on the fundamentals of a company and the industry it is in. This includes looking at the company's financial statements, earnings growth potential, management team, and industry outlook.
Buy and hold
After investors place a trading order on the trading platform, the broker will forward the order to the stock exchange. In the exchange, the order enters the trading system and waits for matching. If it is a buy order, the system will look for a corresponding sell order. When the buy and sell prices and quantities match, the transaction can be completed.
For example, investor A wants to buy 100 shares of Tencent stock at 50 yuan per share. The broker sends the order to the exchange. At this time, if investor B wants to sell 100 shares of Tencent stock at 50 yuan per share, the trading system will automatically match and complete the transaction.
Risk Management
The stock market is volatile, so investors need to manage their risk. Common risk management strategies include diversification, setting stop-loss points, and regularly reviewing the portfolio.
Conclusion
Understanding the stock market's operating mechanisms and major participants can help investors better grasp market opportunities, manage investment risks, and realize wealth appreciation. Although the stock market is full of opportunities, it is also accompanied by risks. Investors should always remain rational and make long-term investment plans.
