The stock market and its role in financing the economy
Thanks to the rapid development of technology, you have the opportunity to more easily access the financial markets to start investing in the stock market. However, you may not know how to invest in the stock market. Perhaps terms like stock index, stocks or bonds seem too complicated for you.
If you want to get started in the stock market, this article is for you. We are going to give you explanations about the stock market in an easy way to understand what is the stock market for beginners: What is the stock market?
Stock Market Research for Dummies - Definition
How does the stock market work? What is the stock market and how does it work?
A stock exchange is a market where financial instruments such as stocks, mutual funds, currencies, bonds, etc. are traded. Like any other market, it is dominated by the law of supply and demand.
If a stock is in high demand, its price rises because there are buyers in the market. If the stock falls, there are more sellers than buyers in the market.
The stock market through shares allows companies to finance their activities by selling shares of their capital in the form of shares. Shares also allow investors to become owners of a part of the company's capital. Stock market shares entitle you to:
- Receive dividends if the company pays them,
- Participation and voting at general meetings.
Why invest in the stock market?
The stock market allows you to create a diversified portfolio of several asset classes: stocks, bonds, money market. Depending on your risk profile, you can create a diversified portfolio. Stocks listed on the stock exchange offer some of the highest long-term returns, but be aware of the risks associated with this asset class: capital risk, liquidity risk, exchange rate risk. That's why you should develop and respect money management.
Stock market functions
The stock market performs an important function for the economy and offers six main functions:
- Traditional loans and loans
- Money flow information
- Risk allocation
Financial institutions help facilitate the movement and circulation of funds in world markets and in the financial system as a whole.
These institutions include commercial banks, investment banks, central banks, insurance companies, brokers, and even non-banking financial institutions (such as credit unions).
What is the purpose of the stock exchange?
- Funding businesses in need
- Building wealth for risk-taking shareholders
- Supporting the economy and increasing GDP
Buying shares on the stock market essentially means offering money to a company to grow it. In this way, the company will be able to create jobs, invest in research, buy industrial equipment, etc. In return, you will become the owner of a share of this company, which gives you access to some of the wealth created with your money through dividends!
By buying shares, you can support the economy as a whole, as you participate in the creation of value added (GDP).
This is why investing in the stock market is both an economic and a social act! By supporting enterprises, you allow them to create more wealth and therefore redistribute it through wages and dividends, as well as create jobs and ultimately improve the standard of living of the entire population.
Now that you know what the stock exchange is for, it's important to know the different participants.
Who can invest in the stock market?
Anyone can buy or sell financial assets on the stock exchange: individuals who want to invest their money, companies that need funding or want to invest their surplus cash, and institutional investors such as banks, pension company funds, insurance companies, asset management companies.
Institutional investors have an extremely significant weight in daily stock market volumes. For example, for an individual, €10,000 is a significant amount to invest in a stock market portfolio, but it is easier for a bank to raise capital and can therefore invest several million euros at once. As you can imagine, institutional investors have a very big impact on financial markets.
How the stock market works: stock prices fluctuate daily
How does the stock market work?
The stock exchange works like any other market. Investors decide to sell their shares when they expect the price to fall and, conversely, decide to buy a share when they expect the price to rise. Stock prices change daily in real time.
So the price will vary depending on the number of buyers and the number of sellers. If there are more buyers than sellers, the price will rise. And vice versa.
Volatility is a measure of how much the price of a financial instrument fluctuates over time. The measurement is made using the standard deviation. This allows you to quantify the risk of return and the price of a financial instrument. Significant volatility indicates the possibility of both significant profits and significant losses.
You should also know that investors hate to be scared.
Thus, if a negative element disrupts the stock market session (war, virus, oil shock, economic crisis), investors will get scared, want to sell quickly and, therefore, there will be more sellers than buyers. As we just saw, when there are more sellers than buyers, the price falls. The fact that investors are rushing to sell their assets will amplify the downward movement, which is why an index like the CAC 40 could drop sharply in a day or more.
In fact, if you're interested in an asset that mimics the feeling of fear in the stock market, you might want to take a look at the VIX.
Is it possible to make money on the stock market?
Shareholders have a golden rule: diversify their investment portfolio. Diversification allows you to invest in multiple assets and therefore risk multiple financial instruments, multiple sectors, multiple geographies. So you can buy different stocks, but you can also buy ETFs. ETFs are baskets of stocks that reflect an index or theme. For example, the CAC 40 ETF will allow you to invest in a fund that reflects CAC 40 without having to buy every share of the companies that make up the CAC 40.
It is equally important to be able to sell. In money management, it is important to set a goal to be achieved. This method will let you know when to close the position.
In order to invest their money and increase their savings, investors turn to financial markets. There are several ways to invest in the stock market:
- Capital Gain: An investor buys stocks that have potential and holds them in the hope that their price will increase over time. By reselling it for more than he bought, he earns the difference.
Receipt of income: the investor buys shares that generate income, that is, on which dividends are regularly paid. This is a periodic compensation (usually quarterly) that a company offers to all its shareholders.
- A combination of both: in an effort to maximize profits in the stock market, newcomers and experts in the stock market tend to buy profitable stocks that pay dividends in order to earn dividends and capital by selling them later.
- Shorting: Selling a stock you don't own to speculate on a fall in its price. The investor receives capital when prices fall, but does not receive dividends. This method is not recommended for beginners in financial markets.
- Derivative Speculation: Beginner stock market traders sometimes turn to derivatives to speculate in the stock market. These are instruments (CFDs, futures, options, etc.) that allow you to speculate on the rise or fall of a security within a short period of time and with a leverage effect.
Getting started in the stock market requires careful analysis to choose which investment method to choose. It depends primarily on the investment horizon and risk.
Almost every novice trader prefers to take on more risk in an attempt to earn more. On the other hand, a long-term investor is willing to limit his potential profit in order to take on less risk.
In any case, learning the stock market and finding the time to understand the stock market is an absolute must.
Warning: If you want to invest in the stock market, you need to know 2 things:
- The stock market is a risky market with ups and downs. There are times when you can make a profit, and there are times when you need to stay away or limit your losses.
- There are no magic bullets or martingales for success in the stock market.
Beware of scam sites, scammers and anyone who tells you that making money in the stock market is easy and without risk.
Study the stock market for free
On the Internet you can find many tutorials on how to easily invest in the stock market, online trading and other tutorials for traders.
Learn to trade in 20 days, from preparation to execution
To get started in the stock market, you can download a demo account and try to apply what you have learned in these courses. After that, you will have access to stock market prices, stock quotes and tips. When investing in the stock market, practice is as important as theory.
You can take your first steps in the stock market by buying your first shares. Monitoring your investments will allow you to understand the rise or fall of their value without any risk thanks to a demo account.
Where does the money we earn in the stock markets come from?
Here is a question that novice traders do not always find the answer to. We can say that the stock market is a zero-sum game, because one person's gain results in another person's loss. Thus, one person wins at the expense of another person.
For example: if we buy Microsoft shares today at $290 and tomorrow the price rises to $300, we can earn $10 per share. On the other hand, a seller who sold shares at $290 would not be able to benefit from the price increase and could lose $10.
Let's take the opposite example: if we buy Microsoft stock at $290 today and $280 tomorrow, the buyer will lose $10 and the seller will in turn win $10.
Warning: In order to sell shares short, you must invest in a derivative product per share. Moreover, if we look at CFDs (Contracts for Difference), the possibility of short selling is one of the reasons for the development of this market.
Thousands of stocks and ETFs at your fingertips
How to start investing in the stock market?
- Choose a regulated stock broker that offers a financially recognized investment platform with transparent fees and open an investment account with this broker.
- Do a different analysis of different asset classes: stocks, indices, currencies, commodities, ETFs, bonds and determine the risk you want to take and the amount you want to invest. Never invest money that you will need in the near future.
- Learn, learn, be curious and practice on a free demo account.
Choose the assets you want to invest in.
- Place an order on the platform, specifying the desired leverage (pay attention to its use), stop loss and take profit.
- Keep track of your money management and risk profile.
It is important to have access to an online investment and trading platform. Through this platform, you will be able to access stock market prices, global stock market quotes and even preview prices. It is essential that this platform provides you with stock market quotes for a peaceful investment.
Stock market simulator - learn how to "play" the stock market online for beginners
Using a demo account, also referred to as an "online stock market simulator", is the safest way to test the stock market without risking losing your capital. Virtual money trading simulators are offered by online brokers and allow investors to test market conditions in a risk-free environment with real-time stock prices.
If you're new to the stock market and want to discover the world for yourself, you might want to watch this to form your own opinion.
With a demo account, you have the opportunity to understand the online stock market for beginners and practice the stock market, try stock market speculation or long-term investments, understand how the stock market works. scholarship as we have explained to you in this article. Trading with virtual funds gives you an idea of how the stock market works and when to invest in the stock market for forex beginners.
Warning: The stock market is not a game. The risks are real when you invest in a live account. For all those who are wondering how to play the stock market for beginners, you should definitely understand that the stock market is not a game.
Practice trading with virtual funds
The Importance of Diversification in Getting Started in the Stock Market
Whether you are new to the stock market or an expert in the financial markets, an investor cannot avoid the phases of a market downturn. However, he can avoid the significant risk associated with an undiversified investment portfolio.
Diversification helps to protect investments in general from the inevitable failures in specific markets. If you invest all your money in one stock market, you are speculating on success, which can quickly jeopardize issues specific to that company (such as regulatory issues, bad management, or scandal).
To mitigate this company or asset specific risk, investors diversify their funds by investing their money in different types of stocks and markets. Any losses in a particular market will be offset by gains in other markets.
At the same time, making diversified financial investments can take a lot of time, research, and patience. An alternative would be exchange-traded funds, also known as ETFs, which contain a basket of investments. By using them, you will automatically diversify.
Types of financial markets for beginners
Many traders tend to focus on one financial market such as stocks or CFDs, but it is important to have an overviewof all stock markets as they can influence each other.
Over the past decades, financial markets have grown exponentially and now offer many types of financial instruments.
Here are the most important ones:
– Also called foreign exchange market or foreign exchange market.
- Capital markets, such as equity and bond markets.
- Derivatives markets such as CFDs (also known as contracts for differences)
- Commodity markets, including gold, silver and oil.
- Money markets, such as short-term debt.
Some of these financial markets are inherently longer-term, short-term, or a combination of both. Forex, stocks, CFDs and commodities, for example, can be traded in both the short and long term.
Beginner traders in the stock market can decide whether to invest in the long term or speculate in the short term, depending on their own approach and the beginner's trading strategy.
Is it time to make it public?
Thanks to regular investments there are no questions. It is impossible to predict the future in financial markets. On the other hand, knowing how to invest regularly will allow you to smooth your purchase price.
Regular investment to this day remains the recognized financial and financial strategy that eliminates the question of the best time to invest.
You don't know when the next stock market crash will happen. This can happen a week after your investment or 5 years later.
Reducing the risk of your investment is very important. So, instead of taking significant risk by investing all of your savings at once, why not take the time to invest the same amount over several months.
Take as an example an investor, Mr. Delta, who invests €2,500 in share A, which is valued at €10.
- Mr. Delta buys 250 shares in January.
- In February, the share price is 10.5 euros. Mr. Delta is happy, his portfolio has already increased in value by 5% in one month, when his savings account A offers him 1% for one year.
- In March, the virus causes financial markets to panic and the stock market to crash. Stock A drops 30% to €7.35. Mr. Delta does not want to sell, he cannot tell himself that he has lost more than 660 euros. Either way, Mr. Delta is stressed and begins to question his investment. Why didn't he wait another two months?
- In April, the virus is still dangerous, and its share is reduced by another 20% and amounts to 5.88 euros. Mr. Delta's wallet is now worth 1470 euros. Mr. Delta is on the verge of selling his shares. He doesn't sleep very well anymore and his thoughts are solely focused on his investments in the stock market.
- In May, the shares took a breather and are now quoted at 7 euros. Mr. Delta is slightly better, but still under pressure.
- In June, stocks bounced back to the €10 level thanks to the vaccine announcement. Mr. Delta's portfolio is back to baseline. Mr. Delta is better.
Mr. Delta was still very mentally strong not to sell when his portfolio showed a loss of almost 50% of his original investment. Many investors would tell themselves that as soon as the price of share A returns to 10 euros, I will part with it and never return to investing in the stock market. Keep reading to understand the rest of the stock market journey.
His neighbor, Mr. Epsilon, also had 2,500 euros to invest and also wanted to invest in share A.
But unlike Mr. Delta, Mr. Epsilon wants to invest every month for 6 months and decides to invest 417 euros per month to reduce risk and smooth the purchase price.
- In January, he buys 41 shares for 410 euros (quote 10 euros according to Mr. Delta). Its smoothed price is 10 euros.
- In February, the share was quoted at €10.5 and only 39 shares could be bought for €409.5. Its smoothed price is 10.24 euros. My Epsylon keeps an eye on my money management without wondering if now is the right time to invest.
- In March, this share is 7.35 euros. He buys 56 of them for 411.60 €. Even if his stock A line is undervalued, he tells himself that he can buy more than the previous month, as if he were entitled to a discount. His smoothed price is 9.05 euros, so he is also at a loss, but he knows that if he goes up, his capital gain will be greater, because the number of his shares will be more than if he bought his shares right away. .
- In April, this share was quoted at €5.88. Monsieur Epsilon buys 70 of them for 411.60 €. Despite the fall in the stock market, Mr. Epsilon continues to do business. Its smoothed price is 7.97 euros.
- In May, a promotion costs 7 euros. He can buy another 59 worth 413 €. Its smoothed price is €7.76.
- In June, the share price fell to 10 euros. Mr. Epsilon buys 41 of them for the amount of 410 €. Its smoothed price is 8.06 €.
Mr. Epsilon's total investment is €2,465.7, and his equity investment line shows a capital gain of nearly 20%. Epsilon never was bothered by his investments, even when his portfolio was losing value. He still had uninvested money to continue his investment, and he could even choose not to invest any more if he wished.
Things to remember when the market falls hard:
- Regular investment helps to smooth the purchase price.
- If the market drops, you can buy more shares.
- Your stress level will decrease.
If the markets rise in the long run, Mr. Delta stands to gain more than Mr. Epsilon. The goal is to reduce risk and reduce stress to protect yourself so that if markets fall, you can better manage your investments in an orderly manner and not because of your emotions.
For a better understanding, we took the example of one investment. But with monthly investments, it is also important to diversify several assets.
You also need to understand the importance of selling at the right time. As you know, no one can predict the future in the financial markets. By applying a strategy and performance target that you define according to your profile, complemented by technical and fundamental analysis, you will better know when to sell and when it is time to sell. Keeping a number of stocks in your portfolio is not always the right choice and should be evaluated on a case-by-case basis.
What to buy in stock markets?
The first thing to look at is your risk profile. Do you want to invest in stocks in the stock market for a long time, receive dividends and increase your investment portfolio, or rather, trade Forex, CFD, engage in stock speculation, i.e. invest in financial markets in the short term with the aim of aiming to make a quick profit, but taking more risk.
So your value in the stock market will differ due to your risk profile.
Finally, thanks to the Premium Analysis tool, you have access to a real-time information platform, current stock market trends and much more.
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Sectoral and geographic analyzes should also be carried out. Global analysis, called fundamental analysis, as well as technical analysis, are effective investment tools.
You can also read various articles about specific companies to find out what's important. take into account in the analysis. We suggest you read our article about FDJ so that you can understand the important elements to analyze.