What is the stock market?

Elizabeth McGrath

 · 05/15/2020  · 05/15/2020

If you’re reading this, then the chances are you've bought some shares or are thinking of buying shares, but you're still a beginner to the stock market. This article aims to equip you with some basic knowledge to help you make more informed decisions about stock market investing and the risks that come with it.

Let’s start with the basics

The stock market is where buyers and sellers of stocks, (also commonly called “shares” or “equities”), can come together to “trade”, (buy and sell), in shares of publicly listed companies.

Stock markets have been operating all around the world for hundreds of years. Some might say that this has created a prosperous interconnected global economy, based on a shared set of rules and principles of fairness and transparency.

In order to be listed on the stock market, private companies usually have to go through an IPO - (initial public offering.) Once the company has its IPO, it can list itself publicly and its shares can be traded in an open market. Some private companies choose to do a direct listing. In this process, the company sells shares directly to the public without getting help from intermediaries.

There are 60 major stock exchanges globally, but all are based upon one simple concept: connecting stock buyers with stock sellers to trade under an agreed set of rules. These include transparency of price, investor protection, accurate news and real-time data. This is the key function of every stock market; from London to New York to Hong Kong.

How does the stock market actually work?

Companies sell tiny pieces of themselves to investors (like you and me) to buy. This frees up cash for them to potentially invest their efforts into things like expanding into new countries, hiring new employees or inventing new products. Re-investing in themselves can help to increase their stock value, which in turn may help the market to keep growing.

If a company on the stock market makes money and it goes up in value, subsequently everyone who owns shares in that company stand to potentially make money too. Likewise, if a company loses money, the value of everyone’s shares could go down, meaning they may have made a ‘loss’ on their investment. But beware, if a company has debt and it becomes insolvent, it is likely that any lending to the company will be paid back first before any holders of shares. Please also note that trading in fractional shares, (which are very small pieces of whole company shares), has its own unique risks and limitations such as that they cannot be traded on the open market and the only way to sell is through a trading platform or brokerage.

Historically, the stock market was something that most people did not have ready access to, because it was expensive and long-winded to make even a simple trade. You had to employ stockbrokers, agents or investment firms to execute your trades on your behalf and they charged an assortment of sizeable fees and commissions for their services. Then there was the paperwork too which added an administrative burden.

At Revolut Trading, we have done away with all those barriers to entry and have made commission-free trading (within your monthly allowance) available to individuals (like you and me). You can get investing from as little as $1, subject to Terms + Conditions described below.

What stock exchanges does Revolut give you access to?

At Revolut, we currently make available stocks listed on the two best-known stock exchanges in America: The NYSE and Nasdaq. The New York Stock Exchange, (NYSE), was established in 1792, and today features a combination of electronic trading and a physical trading floor (with human traders) located on Wall Street. It’s famed for the bell rung every morning (at 9:30 am local time) and afternoon (at 4:00 pm) to mark the start and close of the trading day. Its trading floor is now a National Historic Landmark.

The Nasdaq, (National Association of Securities Dealers Automated Quotations), was established in 1971 as the world’s first electronic stock market and was the first US stock market to trade online. It doesn’t have a central trading floor with human traders – it’s just digital –making it popular with tech companies.

The NYSE and Nasdaq compete with each other for companies that are choosing where to list their shares, but this doesn’t affect you as a buyer or seller. They are based in different parts of New York – the NYSE is in downtown Manhattan and the Nasdaq is in midtown – presumably because the town ain’t big enough for the both of them.

Read all about it

The news has an important part to play in a company’s value on the stock market. For example, if a company releases a new product and consumers go wild for it, then the value of its shares could go up. This is called a ‘spike’ or ‘jump’, because of how this looks on a chart.

Likewise, if a company is in the news for negative reasons – let’s say it's involved in an unfortunate scandal – then the company's stock value could go down, sometimes dramatically so. If you hear of shares ‘dipping’, ‘tanking’ or even ‘crashing’, a negative news story is usually involved.

Social media can also have a huge effect on a company’s stock value. Donald Trump is one example of an influential person whose tweets from his Twitter profile can send a company’s stock tumbling. So it’s important to keep your eyes on the news. At Revolut Trading you can easily find the latest news about the companies you are potentially interested in investing in. Just select a company from the stock list, click on it and scroll down; related news can be found here. We believe that knowledge is power.

Why do stocks go up and down so much?

A company’s share value can go up and down on an hourly basis. Nobody can predict what will happen on the stock market as there are so many factors, (social, political, economic, cultural), that can influence the day-to-day performance of a company and its subsequent value. That is just the nature of the beast. It’s not like cash.

Interestingly, the buyers and sellers in the market are the ones who determine the price and value of each stock. Meaning the price you see on those red and green tickers is the last price that someone was willing to buy or sell that stock for. This is why people talk about 'the psychology of investing', because what people think or believe about a company and its future, based on current news and trends, tends to be what drive prices up and down.

Who regulates the US stock market?

The US stock market is tightly regulated to ensure its rules are complied with.

■ The SEC (United Securities and Exchange Commission) protects the investing public through transparency, consistency, and accuracy. They promote fairness and maintain efficient markets. However, investment in shares always carries risk.

■ Price transparency: Stock markets should ensure that accurate prices are displayed to maintain fairness. All modern stock markets, (including the NYSE and Nasdaq), have real-time data concerning prices which aim to ensure that the most informed decisions by traders and investors can be made.

■ The investor protection rules from regulators and self-regulatory organisations aim to provide a stable foundation for stock markets to properly function. Bear in mind that prices in stocks and shares will always fluctuate – there is no protection from this fact!

To sum up

Company stocks – and your investments – can fall as well as rise. Therefore, there will always be a certain amount of risk involved when you buy or sell shares – and you should always have enough money set aside for your day-to-day needs and emergencies.

However, if you look at the market’s progress over the last 120+ years, it has continued to grow. Even in the face of serious adversity, including Wall Street crashes, World Wars and dot.com bubbles, the stock market has ultimately recovered and proven its stability and resilience, time and time again. Past performance of course, is not a reliable indicator of future performance, particularly in the current market environment and the impact of COVID-19.

Read next: Trading vs Investing: How Are They Different?

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