How the stock market works and what you need to know to become a member

2024 Author: Malcolm Clapton | [email protected]. Last modified: 2023-12-17 03:44

It is much closer to the grocery or clothing stalls than it seems.

What is the stock market

It is difficult to give an exact definition of the concept of "stock market". Dean of the Faculty of Economics and Business of the Financial University under the Government of the Russian Federation Ekaterina Bezsmertnaya notes that even professionals cannot agree on an interpretation.

In ordinary life, this phrase easily evokes associations with films, where serious men in suits call on the phone and buy or sell something, shouting over each other. Many more people know that the stock market can rise or fall, and the latter sounds very alarming.

If you do not intrude into the terminological jungle, then in its most general form the stock market is the market in which securities are issued, sold and bought. These are mainly stocks and bonds, as well as other bills of exchange, checks, investment shares, depositary receipts, and so on.

Ekaterina Bezsmertnaya Dean of the Faculty of Economics and Business of the Financial University under the Government of the Russian Federation

To better understand how the stock market works, the expert proposes to imagine an ordinary one. It has several components:

• the place where they trade - open-air rows or a special building;
• goods;
• trade participants - sellers and buyers;
• producers of goods - they do not participate directly in trade, but without them the market will not exist;
• regulatory bodies and procedures - government agencies, trade rules, and so on.

The stock market has all the same components:

• the place where they trade - the stock exchange or over-the-counter market, where transactions in securities are carried out directly between buyers and sellers;
• goods - securities;
• trade participants - brokers, dealers, investors;
• manufacturers of goods - companies that issue securities;
• regulatory bodies and procedures - stock market regulators, laws and other regulations.

The work of the stock market is determined by the supervisory authorities. They license professional participants and publish information related to trading procedures. In Russia, this is done by the Central Bank. In the United States, the Securities and Exchange Commission (SEC) operates, although the specifics of its work are somewhat different from the domestic approach.

Vladimir Maslennikov Vice President of QBF

Is there a difference between the stock market and the exchange

Sometimes these concepts are used as synonymous, but Ekaterina Bezsmertnaya notes that it is impossible to put an equal sign between them, although they are close in meaning.

An exchange is a place where a buyer and a seller meet to buy and sell goods of a particular category. Exchanges can be:

• commodity - they sell oil, metals, agricultural products and so on;
• currency, stock, derivatives - futures and options are traded on them;
• universal - different sections act on them.

For example, Moscow Exchange, the largest in Russia, is a multifunctional platform that consists of several specialized markets.

The stock market is a broader concept than the stock exchange. In general, after the release, securities can be traded outside the exchange floors - directly between counterparties. But when we talk about the stock market and ordinary, unprofessional investments in securities, one way or another, we will constantly return to the stock exchange.

How the stock exchange works

The exchange is not only a trading platform. It has several more functions, for example:

• make sure that the participants follow the rules and do not deceive each other when buying and selling;
• maintain fair pricing in determining the purchase and sale price of assets;
• ensure the transparency and availability of information about trading and securities.

In Russia, this activity can only be carried out by a joint-stock company with a license. It is issued by the Central Bank, and it also controls whether everything is done according to the rules. If not, the regulator has the right to withdraw the permit.

The exchange does not admit everyone to trading. It includes securities that have passed the selection according to certain criteria - listing. For example, the Moscow Exchange has three listing levels. On the first are the most reliable assets, on the third - admitted to trading, but not yet valued so high. To move between levels, a company needs to work for more than three years, submit financial statements annually and fulfill other requirements.

Trading on the stock exchange can take place over the Internet or with the direct presence of brokers, as in the movies. This format still exists, and the same Moscow Exchange practices a mixed approach, combining traditional and online methods.

Why you need a broker to trade on the exchange

Only legal entities with an appropriate license are allowed to participate in the auction. Everyone else, in order to conduct transactions on the exchange, needs an intermediary, that is, a broker.

A specialized company will open a brokerage or individual investment account (IIA) for you and provide you with access to tools with which you can submit orders for the sale and purchase of securities.

Usually, they offer to install a mobile application for this, but there are also companies that are slower than others to master the achievements of technical progress. Therefore, be sure to evaluate how convenient it is for you to use the services of a broker when you choose one.

The broker's functions are not limited to opening an account. He pays taxes on your income and prepares documents for tax deduction. Many companies run courses for investors or offer asset management services to clients.

What you need to know to trade the stock market

Investing assumes that you are constantly engaged in self-education in this area. This is one of the golden rules, but there are a few more no less precious theses that will save you from unjustified losses.

Invest only in tools that you understand how they work

If you are planning to invest in bonds, you must understand how income is generated and what the risks are. Otherwise, you need to take a break and study the issue.

The higher the yield, the higher the risk

Let's take, for example, bonds of the Ministry of Finance and shares of a startup. The first is a kind of debt securities from the state, which takes money from you for a while, and in return promises to return it with interest. Usually we are talking about small payments, but the likelihood of not receiving them is small, because states rarely go bankrupt. As a result, we have a relatively low return with a relatively low risk.

This is not the case with startup stocks. If he shows promise, the value of securities could rise to dizzying numbers. At the same time, the company is new, so any miscalculation can bring down the share price. Total: we have a chance to make good money, but we are also at greater risk.

Which strategy is the best depends on what you want and what you are willing to sacrifice for possible success. But too high a yield is always a reason to be wary. If someone promises you an annual return of even 50%, it smells of fraud.

Investing is a long-term game

So you shouldn't count on quick profits.

Of course, anything can happen. Let's say you bought Zoom shares on the eve of the coronavirus pandemic, sold them in November 2020 and hit the jackpot.

But if we are talking about novice investors who are not yet strong in forecasts and plan to make money on investments, and not on speculation, that is, a quick resale of assets, then it is worth counting on a longer period - at least three years.

Securities portfolio needs diversification

If you buy shares of only one company, then if their price falls, you risk losing a lot of money. Therefore, the portfolio is usually diversified, that is, filled with different contents.

For example, it combines rather reliable bonds of the state and corporate giants, stocks of slow-growing large companies and rather risky startups that can show explosive growth.

This strategy helps not to lose everything overnight due to a combination of circumstances. If something in a well-diversified portfolio drops dramatically, other securities should counterbalance the decline.

It is worth remembering about commissions and taxes

Investing is not only about earning, but also responsibility for it. Income from securities is taxed but can be offset with tax deductions.

You also have to keep track of how much you spend on brokerage services. Sometimes the prices of the intermediary can eat up all the profits, so it is important to understand this in time and change the broker.