World Stock Market
World Stock Market
is by definition a market in which shares of companies’
stocks are bought and sold. Let’s explain this. When
companies start growing they need to find investors willing
to invest on the company. They need to raise money to keep
buying machines and products and to expand their businesses.
At the same time many investors want to find companies where
they can invest their funds, so they can receive passive
income from the growth of those companies, which usually
cause a growth on their portfolio of invested funds.
A long time ago, companies discovered that the most
profitable, easy, fast and effective way to find the
investors is through an organised system, in which there is
liquidity, and through which all interested individuals
could bring in funds to keep developing their businesses and
enterprises. That originated the World Stock Market, which
has been evolving and improving for a long time. People can
trade and invest on the world stock market through
Exchanges. For example the New York Stock Exchange, or the
American Stocks and Options Exchange. Exchanges are
regulated agencies, which facilitate the transactions
between buyers and sellers in the world stock market and
ensure the fairness of each transaction for everyone.
Stockbrokers also facilitate transactions for their clients
and earn a commission for doing so.
The
economic health of each of the countries in the world stock
market will strongly influence it. When the economy is doing
well the market is bullish. Bull markets occur during times
of high economic production, low unemployment and low
inflation. Bear markets, on the other hand, follow downturns
in the economy. When inflation and unemployment are rising,
the world stock market prices are usually falling.
The world
stock market price fluctuations are also driven by supply
and demand, which in turn are dependent to a great degree on
investor psychology. Seeing a stock price rise rapidly can
cause investors to jump on the bandwagon, and this rush to
buy drives the price up even faster. A falling price can
have a similar effect in the other direction. These are
short-term fluctuations. World stock market prices tend to
normalize after such runs.
In the
world stock market like in many others you can be an
investor or you can be a trader/speculator. Investors are
corporations or individuals that want to invest an amount of
money, usually a large amount, and keep on the world stock
market for a while to profit from a long term trend. They
want to grow their money, but they also want safe
investments. They are not gamblers. They usually have large
amounts of available funds so they can afford to leave their
money on the world stock market for months and sometimes
even many years (2-5 years and more). Traders and
speculators usually want fast profits from the world stock
market. They may or may not have large amounts of available
funds for trading and even if they do, they don’t want to
risk them too much. This is because traders usually take
considerably higher risks than investors do. Many of them
not only trade shares of stock, but also derivatives. The
latter is explained further down in the text. To get bigger
profits from the world stock market they incur in biggest
risks. Many of them are those that want to become rich in a
few months. They want higher than average results. In fact
they want the highest possible results. Many traders and
speculators loose all their money on the world stock market
while others make fortunes. It is thought that knowledge,
sound reasoning and common sense are three major factors
affecting the outcome of any financial decision that you
make.
The term
stock usually refers to the name of the company or symbol in
the world stock market. For example the stock symbol for
Microsoft Corporation is MSFT. When you want to check quotes
or check the graphics on your account you enter the stock
symbol and get all the information. What are traded through
exchanges in the world stock market are shares of stock. A
share is a piece of ownership. Think about this as a pizza
where the pizza is the stock or the company and every slice
is a share. There are companies with millions and millions
of shares (slices) while others have fewer shares. When you
buy, sell invest or trade on the world stock market, you are
commonly dealing with the companies shares. Usually if the
companies increase in value, you make money. If the stock
prices rise you make money (if you have a long position,
which means you bought the shares). Other factors could also
affect your profits like news, rumours and the world stock
market sentiment.
You can seek the advice of a licensed professional, a
stockbroker, or you can trade by yourself using the
Internet. There are an increasing number of individuals that
are investing and trading in the world stock market from the
comfort of their own house. To do it by yourself you will
need to sign up with a brokerage firm like E*Trade or TD
Warehouse or any other. There are many out there. You can
choose which one fits your interests and your needs. Once
you sign up and fund your account you can start trading on
the world stock market for yourself. Although people often
like to have a stockbroker make all the trading for them.
Another concept met by the world stock market is volatility.
It is has to do with price fluctuations, how fast and how
often prices change. If the stock price decreases and
increases fast and too much in a short period of time, it is
said to be very volatile – the prices change too often, too
fast and the difference is big, so the investment is risky.
If the opposite happens and the prices almost don’t change
at all, it is said to be a low volatile stock – if there are
not sudden and unexpected price changes, then the investment
is less risky. When trading in the world stock market,
traders usually prefer volatile stocks, because they seek to
profit from sudden price changes in a short period of time.
Investors prefer steady, slow but secure growth of the world
stock market. They don’t like surprises very much.
Derivatives are another issue in the world stock market.
Derivatives are financial instruments that derive their
value from the underlying assets. There are a wide variety
of derivatives and they are flexible instruments. Some
derivatives for example may derive their value from other
underlying derivatives. The main idea is that they do not
convey ownership like stock shares in the world stock
market; they just establish rights and obligations.
Derivatives are a little bit harder to understand in the
world stock market than stock options. There are many
different kinds of derivatives on the financial markets.
Even experienced investors may know some of them, but not
all of them. The most commonly used derivatives in the world
stock market, i.e. Options and Futures, will be discussed
briefly below.
If you buy an option in the world stock market you have the
right but not the obligation to purchase something, whatever
it is that is specified on the contract, at a certain price
before a specified date. In the case of stock options you
have the right to purchase shares. In the world stock
market, option contracts use specific terms. They also
include a period of time in which you can exercise the
option, which means you can buy the underlying asset. If you
don’t exercise the option on the specified period of time,
then your option expires worthless and you loose the
premium, the money you paid for the option. The reason why
options are so famous, so useful and so important in the
world stock market is that option trading can make you earn
much higher return on your investment or they just can make
you loose everything fast. In other words you can leverage
your investment. You can have explosive profits, but you
must be willing to accept the high risks involved with world
stock market’s option trading since you can loose it all
fast. Remember that if you don’t sell the option contracts
that you bought or if you don’t exercise them on the period
of time specified on the contract, then you just loose your
entire investment. Sometimes people start trading world
stock market options without even knowing this! All of the
above may sound a little confusing for new traders and
investors. Stock option contracts may require you to study
for a while before you can start to understand the entire
process or how they work. Remember that in any business,
non-exclusive of the world stock market, knowledge is the
key to success.
The second derivative in the world stock market is the
futures. A futures contract is an agreement to buy or sell
something that could be a commodity or a stock, for example,
at a specified price on a particular date in the future. For
example you make an agreement in the world stock market to
buy 100,000 shares of Microsoft Corporation at $50 each two
months from now. At the same time, someone somewhere is
making the same agreement but instead of buying, that person
is selling. These contracts are traded through the world
stock market exchanges which take neutral positions so they
don’t loose. What’s the deal here? For example if today is
January 1st, and you agree to purchase the stocks above by
April 21st under those specified terms and conditions, and
if the current stock prices is $45 per share check what
happens. If the stock price rises in value from January 1st
to April 21st let’s say to $75 per share, then you receive
the contracts at $50 each share and immediately sell the
contracts at $75 per share so your profit is huge. If the
stock price goes down, you can sell the contracts before
April 21st so you don’t loose that much. This is another
kind of derivative in the world stock market that is very
profitable for many traders. A very important fact is that
you can also leverage your trades with this kind of
derivative and get better results, but at the same time, you
incur in higher risks.
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