Stock Trading - The Basics
When a private company wants to raise capital for expansion, it can do so by registering on the stock market. The process involves an IPO, also known as an initial public offering of shares, and in practice this means that investors receive units of ownership, called shares, in exchange for capital.
Companies looking to go public prefer large exchanges like the Nasdaq or the London Stock Exchange (LSE), but in order to be accepted, they need to fulfill certain requirements. Once a company is listed, its shares are available for trading on the stock exchange.
The earliest stock exchanges began operating in the 16th and 17th centuries in shopping malls such as London and Amsterdam. The very first stock exchange as we know it today was the Philadelphia Stock Exchange, which still exists today. However, it was not until the late 18th century, when the New York Stock Exchange was founded, that stocks began to be widely traded.
Until 1792, brokers and traders had an informal agreement to meet under the button tree on Wall Street to negotiate the purchase and sale of shares. What became known as the Buttonwood Agreement marked the beginning of modern financial trading. As markets began to be regulated and technology developed, stock trading became available to more and more traders, making the market more liquid and more efficient.
Who Trades Stocks?
The advent of derivatives trading has allowed investors to participate in the stock market without the need for an exchange, as anyone with Internet access can speculate on the price of individual shares through an account with an online broker. With billions of transactions in the stock markets every day, let's take a closer look at the participants in this market:
Private Vendors
This category includes people who buy and sell stocks around the world based on their own estimate of the price and for the sole purpose of making a profit. Private investors account for most of the world's stock trading, and this may include employees who buy shares in the company they work for or fans who buy shares in their favorite sports club to show their support, to name just a few. < / p>
Hedge Funds
Hedge funds are also heavily involved in stock trading, usually buying stocks from various companies to protect their portfolios from risk and improve their performance.
Competitors
A lesser-known category of stock market participants are competitors who may try to gain influence over another company by buying their shares.
What affects the stock price?
The share price essentially represents the company's earnings as well as the dividends paid to shareholders. In today's globalized world, a company's ability to make a profit, and therefore its share price, cannot be explained by just one factor. The reality is that a large number of variables interact and their net effect drives stock prices around the world. Let's take a closer look at the main influencers and their impact on different industries:
Exchange rates
The value of currencies fluctuates in relation to each other 24 hours a day. As practice shows, companies that import benefit when their country's currency rises, as does their purchasing power.
Oil prices
Companies that depend on oil for their business, such as airlines, are the first to suffer from large or unexpected changes in oil prices.
New legislation
Take tax policy, for example. If a country changes its corporate tax laws, it will have a direct impact on the profitability of companies based in that territory.
Interest rates
Interest rates are determined by central banks and reflect the cost of capital. For example, lowering interest rates can give the stock market a significant boost.
Expectations and rumors
Sometimes an event, such as an interest rate cut, may not even take place, but stock markets can move significantly just because of waiting. If the event does not materialize, the markets return to their normal trading levels. This is where the saying “buy the rumor, sell the fact” comes from.
Unpredictable events
Terrorist attacks and natural disasters fall into this category. The September 2011 attacks caused equity markets to plummet, with the Dow Jones losing as much as 7% the day after the tragic event.
While the aforementioned factors and their impact are quite obvious, it is worth noting that sometimes stock prices can rise simply because sentiment in a particular sector is positive. This is why it is important for traders to keep an eye on current trends. A classic example is the explosive growth in online stocks in the dot.com era. During the same period, more traditional sectors such as mining stocks were in a bearish phase.