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Investing 101: How the Stock Market Works?

A stock market presents a great opportunity for investors to earn a large return on investment (ROI). It is like a double edged sword. By investing in the stock market, you can earn double digit returns on your investments or more, but you also can sustain loses as well*.

In order to successfully trade in these financial exchanges,  you need to learn the basics of stock market investing. The more you know about the stock trading and how it works –the more you can achieve the ability to make winning moves, and growing your wealth.

Stock Market: An Introduction

A stock market or stock exchange is a place where a company’s shares can be bought and sold. Every publicly listed company that wants to raise money (known as ‘capital’ in the corporate lingo) issues shares to the individuals. The most famous is the New York Stock Exchange, located on Wall Street in Lower Manhattan, New York City. Another one is the NASDAQ Exchange, as well as the American Stock Exchange, located walking distance from the NYSC.

The shares, which are also known as equities or stocks, are the unit of investment that represents ownership of a company. Anyone that buys shares becomes a ‘shareholder’ of the company. These shares are issued by the companies through a stock exchange or over-the-counter (OTC) market.

As an individual, you can purchase shares through a Dividend Reinvestment Plan or through a stock broker. Either way, you are the owner of these shares and as you continue to invest, your share value in the company grows. You can also invest in stock funds. These are holdings of a variety of stocks that a financial organization has put together. They are usually categorized in groups (called funds) as follows:

  • Growth
    • These are stocks that are estimated to achieve growth in the future months or years.
  • Income
    • These are stocks that grow via dividends that are paid.
  • High Risk
    • Stocks from companies that are considered high risk, whereby the financial organizations are not sure if they will grow or not, but if they do, the payoff is usually high.
  • International
    • Shares from companies that are not from the United States.
  • Balanced
    • A consolidation of growth, income, high risk and/or international shares.

What is a stock exchange and OTC market?

A stock exchange is a privately owned company that facilitates the buying and selling of shares. Companies that are publicly listed on the exchange are allowed to offer shares for sale to  individuals.  Many countries have their own stock exchange company. Major stock exchanges in the world include:

  • NASDAQ, New York Stock Exchange (USA),
  • London Stock Exchange (UK-Italy),
  • Tokyo Stock Exchange (Japan),
  • Euronext (EU),
  • Frankfurt Stock Exchange (Germany),
  • Shanghai Stock Exchange, Shenzhen Stock Exchange (China),  and
  • Hong Kong Stock Exchange (China S.A.R).

Contrary to this, an OTC market is the one where stocks are bought and sold through independent dealers instead of a centralized exchange.

You can make money in the stock market in two ways. One way is to sell a stock when its price rises in the stock market. Another way that you can earn income by investing in stocks is through dividends that are distributed by the companies during annual meetings.

Now that you have gained a basic understanding of the stock market, the next important thing is to read advanced topics on the stock investment. Remember that you must conduct a thorough research before investing in any particular stock. Your end goal should be to create a balanced stock portfolio that maximizes the investment return potential while keeping the risk of loss to a minimum.

*Disclaimer. This article is for information purposes only. Investor is advised that he/she is solely responsible for any investment purchased and holds Rich Feinsilver, Esq. and feinlawny.com harmless from any liability.