The Stock Exchange
The path to successful trading on the stock exchange begins with the acquisition of knowledge. Therefore, before you start learning the basics, understand that the term trading stocks is in no way related to gambling. Thinking so and listening to others that claim so is fundamentally wrong. Trading on the stock exchange is not a game of luck, but a job that requires serious knowledge and time investment. Many novice traders believe trading on the stock exchange is like going to a casino. This is far from the truth. Stock quotes, in contrast to the winning numbers on a roulette wheel, are not determined randomly, but according to certain rules and laws. Traders who understand and follow these rules are the ones that receive all the significant benefits.
What is the stock exchange and how does it work?
The stock exchange is a specialized trading platform that provides traders not only with a place to sell and buy securities, but also monitors the security of personal data. All bidders are required to comply with the rules and fulfill the obligations established by a particular exchange. While it pales in comparison to the foreign exchange market, where the daily turnover exceeds $5 trillion, the stock exchange still remains one of the biggest markets, with an average daily turnover of $180 billion. Obviously, this means that there is big money to be made, whether you choose one or the other. The type of stock exchange depends on the instruments that are used during trading. These include: stock, currency, and commodity exchanges. The main clients of the exchange are creditor organizations and broker companies through which private and corporate investors carry out exchange operations. Trading on the stock exchange is conducted mainly through the Internet via special computer applications.
Who are the players on the stock exchange?
Stock exchange players can basically be divided into 3 groups:
- • Investors – people making the investments. An investor spends his savings on acquiring shares in a company, hoping that the firm will grow, as will the value of its securities. You can be classified as an investor whether you hold $2000 worth of shares or $2 million.
- • Issuers – companies that issue securities. Securities for the issuer are a way of attracting additional funds into the company’s turnover.
- • Brokers – professional players who deliver orders for the purchase and sale of contracts on the stock market.
While everything is quite clear with the first two groups, it is worth mentioning the nuances of being an intermediary, or broker. The ability to enable investors and issuers to find each other comes at a cost. The thing is that the conditions for gaining direct access to the stock market are very strict, and expensive for that matter. Many brokers are required to pay a fee in order to have access to the stock exchange, and this fee can range from a few hundred thousand to millions in some cases. Therefore, neither the issuer nor the investor can do without a broker.
Investment types and making a profit
Speaking in the terminology of the traders, the exchange market is run by either the bulls or the bears. The key difference between the two lies is in the way they make money on the stock exchange:
- • Bull traders acquire shares that have a high potential for growth in value. Afterwards, relying on the previously analyzed data, they expect the price to rise, after which they sell the shares. In this case, the traders’ profits consist in the difference between the shares’ worth during the time of their purchase and after their resell at an increased price. A deal that is opened by a trader during the waiting process for the price to increase is called a long position.
- • Bear traders do the exact opposite. They borrow shares from a broker, sell them at a high cost, then proceed to wait for the prices to fall to a certain level. After that, the bears buy cheap shares and give out a loan to the broker. These traders’ profits consist of the difference between selling at a high price and buying at a cheap one. While the trader does not buy the shares, he remains in a short position.
How to trade on the stock exchange?
In order for trading on the stock exchange to be successful, it is necessary that you approach the following key points with maximum responsibility:
- • Choosing a broker. The global securities market is designed in such a way that private investors do not have direct access to the exchange. All transactions on their behalf are performed by stock brokers acting as intermediaries between the exchange and the investor. Therefore, finding a good broker is arguably the most important task for any novice investor. This is the aspect of stock trading where your future will be decided based on your choice. It’s like buying a new car. You don’t want an unreliable one which will fail you in a certain amount of time. Each broker must have a license of a professional securities market participant. You can find out if the chosen intermediary has a corresponding document on the website of the Central Bank in your country. Do not forget to check the rating of its reliability. The best brokers are the ones that belong to the “AAA” group.
- • Platform selection. It is highly recommended that you listen to the advice you will be given by your newly chosen broker for this one. Considering the experience your broker will likely have, review their presented options and choose the one your gut leans towards. The main thing here is to not place all your eggs in one basket, as the saying goes, but to focus your attention on a specific asset. Consult with your broker which strategy you prefer more – a safer one, or one with levels of risk involved. On the basis of this decision, choose which securities you will invest in. Always remember, the higher the risk, the greater both the potential income and the potential loss. If you don’t have the luxury of losing your initial investment, do not play where you should not be playing. Only invest that which you are capable of losing.