Stock Market Basics

The exact meaning of stock market can be stated as the platform where trading of stocks and shares is carried out. Stock market is a comprehensive term that covers different stock exchanges as well as over-the-counter market. Though, a stock market is not a definite physical entity, the stock exchange can be defined as the physical form of the stock market. The stock exchange is a definite physical location where stocks and bonds are traded.

Components of Stock Market

There are a large number of components or aspects that are present in the stock market. These components make the stock market an all inclusive and comprehensive investment hub for the investors as well as the investment companies. Some of the important components of stock markets are as follows:

1) People participating in the stock market can be actually or physically involved in the trading of stocks, shares, bond and securities at the stock exchanges. The stock exchange is the body of the stock market.

2) The stock market consists of all kinds of investors, investment companies and hedge fund traders.

3) The stock market transactions, namely, the purchase and sale of securities are mainly carried out through two methods. The first method is the actual on-the-floor trading or also known as the open outcry method. In this method stock traders or brokers auction the sale or purchase of share by making loud verbal bids and offers respectively. The second method of stock trading is through computerized systems in which trading is carried out with the help of a large and complex network of computers. In this system, stock trading is carried out electronically with traders having access to computer terminals.

4) The stock exchange has a list of companies that have registered with the exchange and only the traders can trade their shares in the stock exchange.

Principles of Stock Market Investments

The stock market functions through the stock exchange with huge transactions taking place everyday in the stock market. While investing in stock markets it is important for the investors to follow certain guidelines or basic principles in order to carry out the task smoothly and easily. Some of the major principles in stock market investing are as follows:

1) Make early inroads: Individuals often make the mistake of beginning to invest very late in their life. There is a general notion about saving a considerable amount and only then going in for stock investments. However, to get maximum returns it is necessary to start investing at an initial stage in the working life. If individuals can manage to invest during their college years through their part-time or summer jobs income, it is the best way of stock market investment.

2) Diversification of Stocks: It is important that that the investor diversifies his stock holdings by purchasing the stocks of different companies. The stock market fluctuates everyday and can have drastic effect on shares of certain companies. Hence, to avoid focusing only on one company and its stocks, it is always advisable to invest in stocks of different companies.

3) Refrain from taking too many risks: It is important that the investors take only a calculated risk when they invest in the stock market. Also, they must not invest in the company whose credentials are not known or not proven. It is imperative that investors invest only in those companies that have almost assured returns and have extremely proven credentials.

4) Avoid relying on past trends: Individuals must not invest in the stock market on the basis of past results or trends. The stock market is highly fluctuating in nature and can have different results at different points of time. The stock markets are affected by various external factors like political conditions in the country, natural calamities and other socio-economic factors and are different each time.

5) Patience: One of the golden rules of stock market investments is that the investor must remain patient and must not react to short-term market slumps. Especially, if he has invested in long-term securities he must remember that temporary market slumps or lows will not affect the investment opportunities of the investor. Hence, he must not hit the panic button immediately when the markets witness a slump. The investor must consider that if the markets experience a downfall then they will also witness a revival.

6) Keep a check on the investments: It is necessary that investors keep a constant check on their stock holdings. The stock markets are extremely vibrant in this current age and stock values can change everyday. Hence, the investor must ensure that he keeps a constant eye on the changing stock market positions.

Importance of Stock Market Investments

The stock markets act as a major source for raising capital for several small and large business firms. They use this capital for further expansion and investment of the company. Hence, the stock market acts as an important source for capital and is therefore a very significant support system for most companies. For the investors, stock markets provide liquidity. They can sell their securities easily in the stock markets for maintaining personal liquidity. This facility and convenience cannot be acquired in real estate investments.

Property investments are not liquid assets and cannot be sold immediately to raise liquidity. The stock markets reflect the overall economic condition and growth prospects of the country. If companies were growing in the expected manner then their share prices would rise, while if they were showing losses then their share prices would fall. Hence, it acts as a great measuring rod for the new investors to decide about their investments.