What Is The Stock Market And What Is Its Function?
The stock market is the market where the shares of companies that have previously been shown to meet a series of requirements are traded. These requirements include obligations of transparency and periodic information, as well as being able to demonstrate a history of positive results.
In the stock market the shares of a listed company are freely bought and sold through qualified agents or brokers with access to the stock market.
The stock market is a market governed by the laws of supply and demand. Therefore, as the number of listed shares of a company is limited, except for capital increases, if the demand to buy shares increases, the share price will increase. On the contrary, if what increases are the sales of securities of that company, the price of the share will fall.
The rise in the price of a company’s share on the Stock Market allows:
- That the company improves its financing possibilities, since it will be able to carry out a capital increase, issuing new shares, at a high price. By doing this you will receive from the market what is called an issue premium.
- That the buyer of the securities can obtain a capital gain with its revaluation.
The stock market therefore fulfills a double mission.
- It improves the financing possibilities of listed companies.
- It serves as an investment instrument.
In addition, given that the most important companies in each country are listed on the stock exchanges, the evolution of the stock exchanges, summarized in the evolution of national stock indices, is usually used as an indicator of the progress of a country’s economy.
Due to its popularity, the stock market is the market in which many investors and traders have taken their first steps. However, such popularity does not mean that investing in the stock market is easy. To be successful as an investor in the stock markets it is necessary to previously acquire some knowledge and also to learn how to handle this knowledge in real market situations.
Tips For Investing In The Stock Market
To learn to invest in the stock market like a professional, you not only have to know financial assets and their analysis tools, but you also have to know how to manage all the emotions that are linked to .
First of all we must control emotions and prevent them from negatively influencing our operations and for this it is advisable to apply these 4 points:
- Practice and previous experience on a demo account.
- Adequate risk management.
- Know how to use leverage.
- Define an investment strategy and follow it.
1 Previous experience in a demo account . Investing in the stock market requires prior learning. The best way to carry out this learning is through a demo account in which no capital is put at risk. AvaTrade offers its clients this possibility, through an account with all the features of a real account, but without putting their money at risk.
2 Adequate risk management. Diversification is the best tool to manage risk. To diversify in the stock market, the following must be taken into account:
- Not investing all available capital according to a single investment strategy.
- Start by investing a small part of the available capital in each operation
- Use the stop-loss to put at risk only the amount that can be assumed at any time as a loss.
3 Know how to use leverage. Trading derivatives like CFDs allows you to use leverage. Leverage trading means trading with more money than is actually available. In order to do this type of trading, the broker provides the operator with a temporary loan that allows him to trade with positions greater than the amount of funds in his account. Therefore, with leverage it is possible to obtain a return associated with a capital greater than that available, but the losses are equally proportional.
It is important to limit leverage so that the capital that is put at risk in the operation is limited to the loss that can be assumed at all times.
4 Define an investment strategy and follow it . Before investing in the Stock Market, you must be clear about the investment strategy to be followed. It is important to have a method and follow it in a disciplined way so as not to get carried away by the emotions of trading at all times.
The investment strategy will vary according to the risk profile of the investor and according to his time horizon: intraday, short, medium or long term.
A fundamental element of each strategy will be the way in which the stop-losses are defined. Typically the shorter the time horizon, the tighter the stop loss will be.
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