The stock market may feel like a foreign language that you want to understand but just can’t seem to grasp. It might seem overwhelming but the more you learn, the more confidence you might have about investing.
The purpose of a stock market is to allow entrepreneurs, or companies, to raise money often referred to as capital by offering shares for sale. The investor who purchases the shares gains a profit in two ways: 1) through dividends, or payments per share on an ongoing basis which are paid out from company profits and 2) from capital appreciation which is when the value of the stock rises over time.
Individual investors, mutual funds, pension plans, insurance companies, exchange traded funds (ETFs), hedge funds and robo-advisors are major participants in the stock market. The market matches buyers and sellers of stocks and facilitates trading at transparent prices. Regulatory bodies like the Securities and Exchange Commission (SEC) oversee the market to ensure fair practices and protect investors.
There are several mechanisms used to trade stocks including placing market orders which execute at the current market price, which is usually a combination of the Bid and Ask, or placing a limit order which will execute only at a certain better price which is set by the investor. There are also other less common methods such as short selling, margin buying which is borrowing to buy stocks and hoping they fall in value, or derivatives which are instruments that can control large blocks of stock for a smaller investment than would be required by outright purchases and sales.