What is the stock market?
The stock market refers to a collection of exchanges and over-the-counter (OTC) marketplaces where publicly listed company shares, as well as other securities such as bonds, are bought and sold by investors and traders. Over-the-counter marketplaces (OTC) give investors the ability to trade securities directly with each other following a detailed set of regulations.
It’s important to note that while the terms “stock market” and “stock exchange” are often used interchangeably, a stock exchange specifically refers to the buying and selling of securities through a regulated exchange, whereas the stock market encompasses all exchanges and OTC marketplaces where securities are traded.
How does the stock market work?
The stock market serves two main functions:
From the company’s point of view the stock market provides access to cash if a company needs to finance a major project, it can sell its shares in the stock market to raise capital instead of borrowing the money from a bank, in other words, the stock market is just another way for the company to get money from investors in exchange of a part of the company. This allows investors to purchase a stake in the company in exchange for their investment.
For the investors, the stock market provides a way to participate in a company’s growth, and also quickly convert shares into cash this happens in two main ways, in a privately held company shareholders typically consist of founders and early investors who can sell their shares on the stock market and earn returns for the risks they took in launching and expanding their business, this is referred to as the primary market, for investors who own shares in publicly listed companies the stock market allows them to participate in the growth of a company without taking the risk of starting their own company, this is referred to as the secondary market.
The world’s leading stock markets comprise several exchanges, with the New York Stock Exchange (NYSE) and NASDAQ being the two main markets in the United States. There are a lot of foreign stock exchanges that do also play a significant role in the global stock market, such as the Toronto Stock Exchange, London Stock Exchange, Hong Kong Stock Exchange, Euronext, and Deutsche Bourse.
In the early days stocks were traded on the exchange floor from person to person, however, nowadays most trades are electronically conducted.
What time do stock markets open?
For major stock markets such as the TORONTO STOCK EXCHANGE (TSX), NEW YORK STOCK EXCHANGE (NYSE), and the NASDAQ, regular trading hours are 9:30 a.m. to 4 p.m. (Eastern), Monday to Friday, except on public holidays recognized by the government in which the market would not be open, as an example, on Christmas Day, the US and Canadian stock markets are closed. North American trading is generally based on the Eastern Time Zone, Any trades that are entered with an online brokerage outside of regular trading hours are executed when markets open unless otherwise indicated.
Traders may face lower risk if they execute their trades during regular market hours because the trading volume during pre-market and after-hours is extremely low which may lead to orders not being filled, the market is also more volatile during pre-market and after-hours that’s why most people place trades during regular market hours.
Commonly known stock exchanges in North America:
- The NASDAQ, short for National Association of Securities Dealers Automated Quotations, is an electronic stock exchange based in the United States and is considered one of the largest in the world based on market capitalization, ranked second globally.
- NYSE (New York Stock Exchange) is an American stock exchange located in Manhattan, New York City, and is the world’s largest stock exchange by market capitalization with billions of trades happening each day.
- TSX (Toronto Stock Exchange) is located in Toronto (Ontario), Canada. It is the 9th largest exchange in the world by market capitalization. The TSX features a diverse range of companies from Canada and internationally.
Preparing for stock market investing:
The best way to prepare for investing in the stock market is to evaluate your risk tolerance, your risk tolerance is influenced by many factors such as your financial goals, time frame, and comfort with market fluctuations. If you have a longer-term outlook, such as saving for retirement, you may be more willing to accept higher levels of risk. On the other hand, if you have short-term goals or prefer a more cautious approach, it is advisable to have a lower exposure to equities. Moreover, investors need to visualize the potential impact of a decline in their portfolio in dollar terms. If you find that significant losses would be emotionally challenging to handle, it may be prudent to consider a more conservative investment strategy with lower volatility.
Remember, investing in stocks involves both risks and rewards. Evaluating your risk tolerance, establishing a solid investment plan, and managing your expectations will position you in a more successful and resilient investment journey.
Factors that influence the stock market:
The stock market is closely linked to the wider economy and responds to shifts in economic indicators and occurrences. Economic metrics like Gross Domestic Product (GDP) expansion, central bank-set interest rates, job reports, and inflation statistics can exert a substantial impact on stock values. For instance, a positive GDP growth announcement can bolster investor faith, resulting in a bullish market. Conversely, an uptick in inflation rates can raise apprehensions regarding buying power, ultimately influencing stock assessments. Investors frequently scrutinize economic indicators as they offer essential information about the general state and trajectory of the economy, which, in turn, shapes trends in the stock market.
News and its Impact on the stock market:
News plays a pivotal role in influencing stock market trends. Real-time information about various economic, political, and corporate events can trigger rapid shifts in stock prices. Market-moving news can encompass a broad range of topics, including earnings reports, government policies, geopolitical events, and global economic conditions. For instance, a corporation’s positive earnings announcement can boost investor confidence and drive stock prices upward. Conversely, negative news, such as a trade dispute between major economies or a sudden change in interest rates, can create uncertainty and result in market volatility. Successful investors closely follow news outlets and financial sources to stay informed about factors that might impact their investments.
