What Is the Stock Exchange? [Beginner’s Guide]
You don't need to be a savvy expert to start investing.
Chances are you have heard something about Wall Street, stock investments, or those kinds of things. But, have you ever stopped to think about what the stock exchange is, how it works, and what it is for?
Maybe not. Don’t worry though, we’re here to help you with that. After you read this article you’ll understand more about the details of a stock exchange and how you can get into the world of stock investments.
First things first
Before we begin, we need to get on the same page about some basic key terms.
- Stock: It is a guarantee that represents the percentage of ownership somebody has over a company. Stocks are bought and sold on the stock exchange.
- Profitability: Also known as the Return On Investment, it is the relation between a specific investment and the economic benefits it generates.
- Debt: It is the liability that a company or a person has of paying a certain amount of money to a creditor.
- Liquidity: It is the ability a good has to turn into cash.
- Credit: It is a loan in which the debtor (who receives the money) commits to return the agreed amount to the creditor in a specific period.
What is the stock exchange?
Now that we’re clear on the basics, we can dive into what the stock exchange is and everything about it.
The stock exchange is a market focused on financial negotiations. It is similar to a common supermarket in which you can buy fruits and vegetables. However, the stock exchange is not a physical place and your groceries are replaced by stocks and other financial products.
The stock exchange has a significant role in the economic and financial development of society. It makes transactions easier and allows a better assignment of resources.
The stock exchange's main functions are:
By selling their stocks in the exchange, companies gain a way of financing their growth, creating new products, and reaching their business goals.
On the other hand, besides increasing the general value of the company, listing on the stock exchange generates a better image of the company for the people. For instance, instead of consuming a King-Cola drink, chances are you’ll rather have one of a popular company you know that has been listed in the stock market for years.
The stock exchange allows anyone to become an investor. By using your savings to invest in stocks, you’ll not only be a partial owner of a company but also increase the profitability of your money.
Fun fact: The stock exchange had its origin in Bruges, Belgium, thanks to the Van der Buërse family. They used to hold meetings where several trading operations took place.
How to invest in the stock exchange?
You know what the stock exchange is. Now you may be wondering how you can start investing.
Don’t feel discouraged if you think you need a lot of money to invest in the stock exchange. That’s not the case.
It doesn’t matter if you are a savvy investor with years of experience or you are a beginner investor trying to figure out how all this works. The stock exchange is open for everyone!
To invest in the stock market, investors get a stock broker. Brokers are certified middlemen that ease the transactions between buyers and sellers of stocks.
If you were looking to buy some stocks years ago, you had to call a broker and tell him about it so he could complete the process for you. Nevertheless, modern technology has made everything a lot easier for investors.
Nowadays, there are digital platforms that fulfill the role of brokers and let investors buy stocks through their smartphones in just a few steps.
Risk of the stock exchange
Everything sounds awesome so far, doesn’t it? However, investing in the stock exchange is not all a bed of roses.
It is important to understand that every single investment in stocks involves a certain level of risk of losing your money. This is caused by the constant changes in stock prices.
Read also: Are There Any Safe Investments?
You can buy a stock worth hundreds of dollars one day, but before the week is over it loses half of its value. This variation in prices is known as market volatility.
This is why you need to know the proper times to buy, hold, or sell a stock. Before putting your money on the line, make sure you do your own research and understand the company you’re investing in.
A common recommendation is to never invest more money than what you’re willing to lose.
To wrap it up
Here we learned more about what the stock exchange is. It is a market of financial instruments where investors buy and sell the stocks of companies.
The stock market offers benefits for both companies and investors. However, make sure to understand the risk involved in the volatility of stock prices.
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