What is a stock market?
A stock market or stock exchange is a financial trading market in which company stocks are bought and sold. A stock market is mainly more organized and regulated in contrast to other markets, such as forex. Additionally, the value of stocks and shares in exchanges are determined by the forces of supply and demand, and are not determined by a commissioned broker.
How the stock market works
A stock market brings together buyers and sellers on one platform and enables them to negotiate prices and transfer of ownership of stocks and shares. In the case of a public limited company, stocks are independently traded on the stock market and the prices are decided by demand and supply from investors. Investors aim to buy stocks at a low price with the expectation that the share price will hike in the future so they can cash out on the price increases. However, the chances are also common for investors to lose their money if the stock price swings down.
Companies initially list their shares through a process known as an IPO (initial public offering). Here, shares of a company are offered as it is transformed from a private to a public company. When investors buy IPO stock, the company can then raises capital and allocate that money for its growth opportunities in the market. Alternatively, companies can also use a SPAC to avoid the IPO process as it’s a cheaper and quicker option.
How to trade stocks in the UK
- Create a trading account:Open an account to spread bet or trade CFDs on stock market price fluctuations. Not sure which account is perfect for you? Review our other articles on spread betting and CFDs or check out this guide for stock trading apps in the UK.
- Research and pick your stocks:When you decide to try your luck at stock picking, it’s essential to do your homework. Before you put trust in a company, you should do thorough research, reviewing a stock’s fundamentals to monitor its viability and checking whether it has room in your portfolio.
- Determine the direction of your trade:Based on your research, choose if you would go long with the stocks and ‘buy’ the stock or go short and ‘sell’. This is a matter of speculating either the price of the stock will swing high or low based on your research.
- Choose a trading strategy:Once you determine which share you are trading on and the direction of that trade, you can decide your entry and exit points based upon your trading plan. Make sure you don’t forget to perform your risk management guidelines as part of your trading plan.
- Close your trade:Keep an eye on your trade and close it as per your trading plan. That is, whether you closed it by the risk management conditions which were previously set by you or not.
- Evaluate and track:Think about your performance in your trade, analysis what went well and what could have gone better. Calculate your performance as per your trading plan to help you keep track of your results.
Types of stocks to trade
Stocks can be differentiated into various groups to help organize the stock market. These can include:
- Top stocks, which refers to that they are the top-performing stocks in a particular industry.
- Stocks which focus on offering a high dividend yield in comparison to the wider market are called dividend stocks.
- Tech stocks, as by the name, are related to stocks in the technology industry.
What moves stock markets?
Fundamental trading facts indicate that the market price of a stock is determined by the demand and supply of that asset. Generally, prices go up if supply of a stock goes down or demand grows. Conversely, prices decline if that stock’s supply swings high from demand. Both of these situations can lead to a stock breakout.
Now take a look, what factors can determine and influence a stock’s supply and demand?
Major stock exchanges require companies to publicize information on their financial performance. This provides stocks and share traders convenience to predict market movements. If a company exceeds its revenue expectations, the share price is likely to increase in order to show the positive picture of the company’s position. In contrast, situations can occur and the prices can go down if a company misses targets or under-performs relative to its forecasts.
Macro-economic factors such as interest rates, inflation rates and GDP (gross domestic product) can cause fluctuations in the supply and demand of all industries. During bull markets, the profits of companies are generally increasing that could cause an increase in demand and the stock’s price. In this situation, sometimes companies decide to execute a stock split and sell fractional shares, which are of a lower value and more affordable for investors. Similarly, if a stock market is experiencing bearish movements; the profits of companies are likely to be decreasing, which causes decreased stock demand and stock prices.
Trade wars, coups, legislation factors, strikes and other political instability can cause major disruptions and changes in markets. For example, if legislation is about to loosen or worsen around a certain industry, it can cause stock prices to increase or decrease in companies operating in that industry as the new legislation could improve or adversely affect business profitability.