How to buy stocks and understand the stock market works

How to buy stocks and understand the stock market works

By: Ivashka_Morozov Date of post: 25.05.2017

We no longer check to see whether Telegraph. To see our content at its best we recommend upgrading if you wish to continue using IE or using another browser such as Firefox, Safari or Google Chrome. How does the stock market affect me? Even if you have never bought or sold a share, it is likely that your financial life is tied up in the performance of stock markets around the world.

Pensions offered by your employer, or mutual funds that you buy through your financial adviser, both rely in part on investment in what are known as equities another word for shares that are bought and sold on a stock exchange. How does the stock market work, in a nutshell?

Stock markets are a way for companies to raise the money they need to grow their businesses.

How the Stock Market Works... EXPLAINED!

They could choose to raise this money by taking on debt — but then they would have to pay a large amount of interest on that debt. The people who buy these shares become part-owners of the company. Why do people buy and sell shares? For any transaction to take place, there must be a seller and a buyer. The price at which they can buy and sell these shares fluctuates during the day for a whole range of reasons, such as relative demand and supply for the shares, news and general mood in the market.

John Ditchfield, financial adviser at Barchester Green, says that while the technology related to large stock exchanges such as the London Stock Exchange is actually now very complex, the idea is far less so. Does it matter how many shares the company has?

How the Stock Market Works | Investopedia

Vodafone, for example, has very deep liquidity — there are lots of shares in issue, the company is big and it is held by lots of different people and entities. Smaller companies, or those where only a certain percentage of the company is floated on the stock market, may have issues with liquidity — you might want to sell or buy your shares, but there might not be many people willing to take the opposing position, buying what you want to sell, or selling what you want to buy.

The bid price is the price at which the market maker will buy shares in a particular company and the offer price is the price at which they will sell them. Why do share prices rises and fall? Companies that are listed on a stock exchange must publish their accounts, usually at least twice a year, so you can see how they are doing financially.

Based on these accounts and meetings with company management, analysts may produce their own forecasts of what profits or losses the company will make next year.

However, because ultimately the reason why share prices move is the difference between the number of shares people are looking to buy and the number of shares people are looking to sell,, the reason for a share price rising or falling may have nothing to do with the company at all. So what other factors can affect the price? Stock markets can fall very fast because investors panic — as soon as a group of people decide there is a problem and sell their stock, others usually follow suit and the price will plummet.

How do investors make money on shares? As well as making money by buying shares when they are cheap and selling them when they are expensive, investors make money on the stock exchange by relying on dividends from their shares.

A company pays a dividend as a way of distributing the profits it has made to its shareholders. It is paid per share held and analysts often use a measurement that calculates the percentage of the share price that is paid as a dividend.

This is called the yield. Not all companies choose to pay dividends. What should I take away from all this?

Knowing about the stock market is very important if you are investing, especially the role that dividends can play. Dividends give you income — rather like the interest you would get from a bank account.

Understanding the reasoning behind daily fluctuations in share prices is also vital.

Understanding the Stock Market: How to Buy Stocks and other Stock Market Basics

Markets do not always act rationally, and often share prices can vary hugely from day to day. Because of this, it is important to look at the long-term performance of share prices, and to hold a diverse portfolio of shares and other assets to guard against volatility in your investments as a whole.

STOCK MARKET JARGON BUSTER. Earnings per share — the amount of profit a company makes divided by the number of shares. Market maker — a company that offers to buy and sell shares in a company while the stock market is open and displays a price to buy and sell those shares.

Offer price — the price a market maker gives to sell shares in a company. Spread — the difference between the offer and bid prices given by a market maker for a share. The Ecology of Investment. A new way to look at personal finance, the Ecology of Investment series, produced by The Telegraph in partnership with Alliance Trust, will show how the complex global financial system, with interconnecting forces and needs, influences your investments.

A new way to look at personal finance, the Ecology of Investment series will show how the complex global financial system, with interconnecting forces and needs, influences your investments. The repercussions of the falling price of oil are felt in every corner of the wider economy, and could have a positive or negative effect on your investments.

For many people, buying funds is their first step into the world of investing — and it is certainly one of the strategies the experts recommend for beginners.

How does an investment trust work? Are they better than unit trusts? Rosie Murray-West gives a definition as part of the Ecology of Investment series.

How the Stock Market Works | Investopedia

Accessibility links Skip to article Skip to navigation. Saturday 17 June Ecology of Investment Life Climate and Environment Resources Habitat Video. How the stock market works, in simple terms Whether or not you invest, having a basic understanding of the stock market is important since it impacts all facets of your financial life.

STOCK MARKET JARGON BUSTER Bid price — the price a market maker gives to buy shares in a company Crash - when share prices fall sharply in a short period of time Dividend — profit distributed from a company to shareholders Earnings per share — the amount of profit a company makes divided by the number of shares Market maker — a company that offers to buy and sell shares in a company while the stock market is open and displays a price to buy and sell those shares Offer price — the price a market maker gives to sell shares in a company Spread — the difference between the offer and bid prices given by a market maker for a share Yield — the percentage of the share price paid out as a dividend The Ecology of Investment A new way to look at personal finance, the Ecology of Investment series, produced by The Telegraph in partnership with Alliance Trust, will show how the complex global financial system, with interconnecting forces and needs, influences your investments.

The Ecology of Investment series. Oil prices and the impact on the economy since Video The repercussions of the falling price of oil are felt in every corner of the wider economy, and could have a positive or negative effect on your investments.

What is a safe haven investment and how do you find one?

how to buy stocks and understand the stock market works

Video For many people, buying funds is their first step into the world of investing — and it is certainly one of the strategies the experts recommend for beginners.

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