Stock markets play a crucial role in the world of finance, serving as a platform for buying and selling shares of publicly traded companies.
While our financial planners will advise and guide you through the investing process, it’s a good idea to understand how stock markets work.
In this article, we will demystify the functioning of stock markets and provide a beginner-friendly guide to navigating this intricate financial world.
What is a Stock Market?
A stock market, or stock exchange, is a regulated marketplace where individuals and institutional investors can buy and sell shares of publicly traded companies.
In the UK, the primary stock exchange is the London Stock Exchange (LSE), although there are alternative platforms such as AIM (Alternative Investment Market) for smaller companies.
Publicly Traded Companies
Publicly traded companies are those that have issued shares to the public and are listed on a stock exchange.
By selling shares, companies raise capital to fund their operations, expansion, and other financial needs.
Buying and Selling Shares
Investors in the stock market can purchase shares of these publicly traded companies through brokers. In the UK, you can do this through traditional brokerage firms or online trading platforms.
When you buy a share, you become a partial owner of the company and have the potential to benefit from its profits and losses.
Stock Market Indices
Stock markets often use indices to track the overall performance of the market or specific sectors.
In the UK, the FTSE 100 is a widely known index that represents the performance of the 100 largest companies listed on the LSE. There are also the FTSE 250 and FTSE All-Share indices, among others, which cover a broader range of companies.
Market Participants
Stock markets are composed of various participants, including:
Retail Investors: Individuals like you and me who buy and sell shares.
Institutional Investors: Large entities such as mutual funds, pension funds, and hedge funds that trade on behalf of many investors.
Market Makers: These are brokerage firms that facilitate trading by buying and selling shares at quoted prices.
Companies: The companies whose shares are being traded.
Regulators: Regulatory authorities like the Financial Conduct Authority (FCA) oversee the functioning of the stock market to ensure fairness and transparency.
How Prices Are Determined
Stock prices are influenced by various factors, including supply and demand, company performance, economic conditions, and market sentiment. When there is high demand for a stock, its price tends to rise, and when demand falls, the price may decline.
Trading Hours
In the UK, stock markets generally operate from 8:00 AM to 4:30 PM on weekdays.
However, after-hours trading and pre-market trading are available through some platforms. Be aware that liquidity may be lower during these extended hours.
Risk and Volatility
Stock markets are subject to fluctuations and volatility. Prices can rise and fall rapidly, and investing in stocks carries inherent risks. Diversification and a long-term investment approach can help manage these risks.
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Investments carry risk. The value of your investments (and income from them) can go down as well as up, and you may get back less than you invested. Past performance is not a reliable indicator of future results. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.