What is Stock Market?
What is Stock Market?
The stock market is one of the most important sectors of the business and financial world. A plunge in the prices of stocks of major companies sends shockwaves of effects affecting a huge number of people. The term stock market refers to the place where collective shares, securities and derivatives of a company are traded. A stock or share is defined as a unit that represents the amount of ownership to a certain business entity, usually corporations. The number of stocks owned by a person in a certain company determines his ownership and share of the profits earned.
The stock market is an avenue for companies to raise their capital. This is done by allowing the public to own a part of the company by purchasing the stocks. However, ownership of stocks does not mean that the investor has access to the financial records of the company or has a direct control of the business. Unless an investor owns majority of the stocks, his only right refers to the profit of the company. The profit derived will then be distributed according to the percentage of ownership based on the number of stocks owned.
One of the main features of trading in the stock market is liquidity. Investors can easily convert their stocks to money by selling their share in the company. Also, transactions in the stock market ensure that investors can sell and collect their payment without risk of default from the buyer.
The stock market has also shown a great influence in the overall perspective with regard to the state of a country’s economy. Rising prices of stocks encourages investors to invest in the companies, expecting huge profits as a consequence. This gives a perception that the economy of the country is doing well. On the other hand, plunging prices of stocks gives a perception to the public that a country’s economy is in decline. The changes in the prices of stocks also affect the household wealth and consumption of an individual.
Conversely, public perception also affects the rise and fall of prices in the stock market. When there is a speculation that the prices of stocks of a particular company will drop, investors tend to sell their shares leading to eventual drop of the prices of stocks. Buying and selling shares in the stock market involves certain risks to investors. Unlike in other types of securities, prices of stocks changes every time, leading to sudden gain or sudden loss. This requires individuals who invest in stocks to manage effectively risk factors involved in stock trading.
Comments
You must be logged in to post a comment.