Stock Markets Explained

Stock Markets Explained

Guest post by Harsh Arora

There is something about a stock market that captivates folks. And while some are convinced that it’s an easy way to make money, many can’t imagine investing in the stock market, and there are still more who know very little about how the markets function. Regardless of their level of trading knowledge, for most people, the stock market is a fascinating enigma. But why?

Why Stock markets?

A stock market is like any other market, there are buyers and sellers. The stock exchanges are the marketplace where the transaction is being carried out, and the products that are bought and sold are financial instruments. Financial instruments are also termed as financial securities. In every other market, products are often purchased for immediate or future consumption. It may be groceries or household items, or it could be assets like real estate or automobiles. Each of these purchases is done with the intent of consumption or with the intent to use. However, Financial products are purchased with an intent to invest.

What Are Financial Products?

Financial security is a tool used by companies to raise funds. Financial securities are comprised of simple financial products like equity shares, bonds and fixed income instruments, and mutual funds. It is also made up of complex financial products like commodities, derivatives and alternative investments. Most investors prefer to invest in simple financial securities, while larger corporations tend to invest in complicated products to offset potential risks. Simple financial securities are issued through a recognized stock exchange. These instruments aid a company in sourcing capital. Even the federal government issues bonds and treasury bills to raise short-term funds. The company or the federal government continues to use these funds for their operations until such a time that they are to be repaid or redeemed. In return, they offer the investor a compensation in the form of a dividend (for equity shares) or by way of interest (in case of equity shares).

Common Misconceptions about Stock Markets

People always fear what they don’t understand, so it’s no surprise that the stock market brings out the worst fears in some investors. There is a lot of uncertainty when it comes to investing in stocks, and every market participant, whether a buyer or a seller, have their own bias and prejudices. This bias can have a substantial impact on their investment decisions. It is necessary to understand, and overcome bias and misconceptions to make money in the markets.

Misconception 1: You can make a quick buck from the Stock Market

This is probably the biggest misconception about the stock market. It’s not a place to get rich quick, gamble, or try your luck. Many investors jump into investing based on market sentiments or an impulse. Without proper research and a thoroughly researched entry and exit strategy, there will be little chance of being profitable over the long term. It is not a get rich quick scheme.

Misconception 2: Stock Market Tips

Many investors are on the lookout for hot leads and stock market tips, but in reality, there aren’t any. There is always a lot of talk about stocks, and each investor has their own opinions. In most cases, people have a favorable opinion about the stocks they own and unfavorable opinion about the ones they don’t own. This is just a reflection of their personal view, and likely has little to do with the markets. Even if they are right about something one time, it’s no guarantee that their information will be useful in the future. Qualified analysts spend a lot of time researching the market trends. Many investment managers and brokers share this analysis with their clients, but even with this professional level of information, there is no guarantee that the investor will make money. Just remember, everyone has an opinion and your mileage may vary.

Misconception 3: Buy, Hold, and Sell Strategy

This is probably the biggest misconception about the stock market. Many investors impulsively buy a stock because they see the stock price climbing, planning to sell it for a large profit when the stock skyrockets. Unfortunately, that’s now how the stock market works. This is termed as the Buy-Hold-Sell Strategy, when an investor buys a stock, holds it for some time and then sells it off for a profit. The stock market is much more complex than this, and there are many factors that will determine whether an investor will be profitable over the long-term. It’s a better idea to implement the the ‘Buy Low, Sell High’ strategy. In this strategy, an investor should purchase a stock when the price is declining instead of when the price is rising. All the investor has to do is hold the stock until a price correction occurs. If the stock is fundamentally strong, the price will increase. This will be the time to sell it off and earn a profit.

Misconception 4: Investment Objective

Every investor should clearly define their investment and risk-return objectives. If the investment has high risk only then will it yield a higher market return. If the market return is less, then, needless to say, that the risk involved is less. If an investor chooses to make short-term investments with minimal risk, he should opt for treasury bills and government securities. Equity stocks tend to have higher risks associated with them. However, there is a tremendous scope to earn capital gains from equity shares. Bonds and fixed income instruments are relatively less risky than equity shares. They offer periodic returns in the form of interest but are still prone to market risk. An investor should define his investment objective with the help of the fund manager. All investments should be in line with the investment objective.

In Conclusion

It’s physically easy to trade in the markets in the digital age, because banks and brokers have designed custom web applications and mobile apps with the hope of keeping their investors engaged. These web solutions use high-end technological frameworks like AngularJS and to make innovative trading platforms that are fast and secure. Understanding the markets and trading successfully requires a significant time investment and being on top of the mental game, as well. It will be fascinating to see what the future holds in trading technology, and what new tools traders will use to become more profitable.

Harsh is a writer at Enuke Software, leading IT solutions provider with a team of 150+ developers focusing on IoT, Blockchain, Healthcare, Travel and Enterprise App Development. He frequently writes about the latest technology trends like Blockchain, the future of IoT, and AI.