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How Do Stock Markets Work?

How Do Stock Markets Work?

October 15, 2021 (LSNews)  Most of the time when people hear about stock markets, their eyes glaze over. It sounds confusing initially, but stock markets and how they function are relatively easy to understand with a little bit of foundational knowledge. When you approach stock market investing properly, it can be a great way to build your financial portfolio and build a nest egg. First, let’s learn how stock markets work and how you can buy stocks.

What are Stocks?

The stock market works through a network of exchanges. Like the NYSE and Nasdaq, companies will list shares to their business on the stock exchange, where other people can buy in and invest. When you buy a stock, you essentially own a small portion of the business. This means that when it does well you will reap the rewards. By investing in the company by buying their shares or stocks, you are allowing them to raise money and expand the business.

There are about 20 different types of stocks, from cyclic and income stocks to IPOs and small or large-cap stocks. Different industries will fall into one of these categories. For example, stocks with market capitalisations of less than $2 billion qualify as small-cap stocks. Cyclic stocks refer to industries that have periods of profitability and recession throughout the year.

How to Buy Stocks

It is very easy nowdays to buy stocks thanks to the proliferation of online stock trading platforms, which act as an online stock broker. You can also purchase shares direct from a company, but online platforms are the easiest way to build a portfolio.

One common strategy amongst experienced investors is short selling. This method refers to borrowing stocks before you pay for them and then selling them to another buyer. The idea is to buy them back later at a lower price when the asset falls in value. Short selling can be effective when the market can be predicted that a certain asset will decrease in price as it takes advantage of the supply and demand. But it can also be more risky than conventional stock buying, and must  be approached with caution.

How Stock Prices are Calculated

The simple mechanics of supply and demand determine stock prices on the market. It’s based on the maximum amount that someone is willing to pay for a specific stock, and the minimum they are willing to sell it for. Essentially, if investors are buying stocks, the price will go up because of demand. If they are selling stocks, the price drops because there is too much supply.

You can value stocks that you have by calculating the ratio of price to earnings (P/E). Take the intrinsic value of the stock and divide it by the earnings in the last year. Faster-growing companies will have a higher P/E ratio than ones that don’t do as well in the market.

Different economic and financial events can fluctuate the prices of stocks, and no company is completely protected. Working with the stock market takes art, skill, and constant commitment to monitor various industries that you have invested in.

Northern Ontario 
Thunder Bay, Sault Ste Marie, Sudbury, Ontario 

 

 

#LSN_Econ 

Categories: OntarioEconomy
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