For a long time, the stock market seemed like a place exclusively for businessmen on Wall Street. However, contemporary technology has allowed it to be for everyone. As investment club leader Caio Sallouti contemplates, “this effect of social media on the stock market can be seen through the GameStop issue;” a group of small investors, based on Reddit, invested in the declining GameStop stocks to swing the prices in their own favor and destabilize the market. Expectedly, this raised interest in how the stock market works, how to invest, and how to be good at it. With this in mind, The Talon seeks to offer its readers a brief summary of the Stock Market.
Keep in mind that there are careers and online tools dedicated to understanding the inner workings of this system. All this article can do is solve the big questions, and set you on the right path to better understand the market.
Stock markets are places where shares of public listed companies are traded on a regular basis. A share is partial ownership of a business that entitles the holder to some degree of the profits. Stock markets are part of a larger ecosystem called capital markets. The two main types of capital markets are equity markets, where you would trade company shares – also called stocks– and bond markets, where you trade companies and government debt.
Companies can sell their shares in stock markets to people in order to raise money to finance current and future investment plans. When you buy a share of any given company at the stock market, whether in Brazil, the US, or anywhere in the world, you become that company’s shareholder who apart from reaping some profits by being a partial owner of the company, you may also enjoy profits if the value of the share rises higher to what you bought it for by the time you sell the stock – these profits are known as dividends and capital gains, respectively.
The first company to sell its share to the public was the Dutch East India Company and later its sister, the Dutch West India Company at the Amsterdam Stock Exchange, possibly the first organized stock market in the world. By selling its share to the public, DWIC raised money to finance, among other projects, its expeditions to Brazil where the Dutch held the sugar trade out of Recife for roughly 40 years during the mid 17th century. At the time, Brazil was the largest export of sugar in the world.
When a company decides to sell its shares to the public for the first time, this transaction is called an initial public offering, or IPO. Once these shares, also called securities, are sold in the primary market through the IPO, they start to trade at the secondary market where the general public can trade these shares regularly.
It should then be fairly straightforward to understand why stock markets are critical to the functioning of capital markets. They stand as an organized forum for the trading of securities in companies, which is a critical element to how companies finance their investments. Without the widespread pooling of these financial resources, companies would not be able to execute their investment plans under acceptable returns as the risks would be too concentrated and costs too high for one or two individuals to bear. By spreading the capital risk among an adequate number of individuals, companies are able to correctly price their investments.
The stock market is also a fairly good indicator of a company’s value which is a critical element for shareholders and other stakeholders in general (like financial institutions, courts, and governments) when making investment decisions. This can be seen through a company’s market capitalization (often reduced to market cap which means the value of a company that is traded on the stock market) and helps potential investors to determine the successes of said investments.
Anyone can trade at the stock market. All you have to do is open an investment account at a registered financial institution and certify that you understand the risks associated with investing in stocks. However, the main difficulty experienced by the public is being successful at investments.
As stated, when you buy a share of a company you are entitled to a piece of its profits and if the price you paid for the stock rises you can sell it for a gain. However, as stocks are a financial unit representing the net value of a company’s assets and liabilities, they fluctuate according to their future prospects. Naturally, when a company is no longer viable for whatever reason, shares of that company can lose all their value. On the other hand, if a company makes a major breakthrough, say creating a revolutionary vaccine that is needed worldwide, its share may appreciate in value and the investor will be entitled to its dividends and the capital gain from the rise in the price of the stock when one decides to sell it.
Understand that this article serves only as an introduction to the stock market; a successful investment journey should not stop here. Thus, Sallouti suggests joining the investment club before you fall into “bad deals,” as he says. But in the meantime, he suggests books like A Random Walk Down Walls Street, The Intelligent Investor, and The Little Book that Beats the Market as good places to start. For a more ‘hands-on’ approach, stock market simulators like Investopedia and Wall Street Survivor offer a realistic investing experience – where you can learn without major losses.
Though this is just a brief overview of the complex anatomy of the Stock Market, The Talon hopes to offer a reliable place to start your investment journey. Who knows? You might take part in the next GameStop fiasco!