A stock market is a place where shares of companies that are publicly owned can be bought and sold either Over-The-Counter (OTC) or through centralised exchanges. The equity market, as it is also known, has established itself as a free-market economy, in that it offers companies the ability to access capital in exchange for providing interested outside parties with a portion in the ownership of the company.  

The stock market or equity market offers an opportunity for investors to increase their income without the high risk of entering their own businesses with high overheads and start-up costs. On the other hand, selling of stocks helps the companies themselves expand exponentially. When you purchase a company’s shares, it is generally associated with an increase in the company’s worth. Therefore, trading on the stock or equity markets can be a win-win for both investor and owner.  

There is a risk, however small or large, depending on the amount of stock bought, that one can lose money in a trading environment.  If the company a stocks trader holds loses value, then so does the trader. If he decides to sell his stocks when the value is lower, he will sell at a loss. 

 

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How is the Stock Market Broken Down? 

There are various segments of the stock market to consider before purchasing a share of a public company. Stock markets can be divided into two: primary markets and secondary markets. 

Primary Market 

This is the market where securities are initially created. This is an open stock market where a company’s shares are offered and sold for the first time and directly from the company issuing them. Having precedence as a primary listed company lends to a company’s credibility and therefore opens doors to investors, who are predisposed to investing in a company by purchasing shares. Larger investment institutes such as investment banks, hedge funds, etc dominate the primary market. 

Secondary Market 

In the secondary market, investors trade existing stocks amongst themselves and (rarely – mainly in the case of a stock buyback) the company that sold the stock initially. Otherwise, the issuing company is not a direct participant in secondary market transactions regarding its own shares. Selling and buying of shares that are already owned by investors is a basic function of the stock market. 

OTC Market 

The OTC market provides an option for investors to take part in the purchasing and selling of stocks from a decentralised market. Transactions are generally executed electronically – either telephonically, through e-mail or via a trading platform, and not through the local stock exchange. The OTC market is usually for stocks and stock prices not commonly listed on the stock exchange. 

The Stock Exchange 

The traditional medium where stocks or shares and other securities are exchanged between two parties, the stock exchange, also known as bourse, can provide facilities for the issue and redemption of financial instruments with the inclusion of the payment of income and dividends. Other assets listed on the stock exchange can include derivatives, unity trusts, bonds and pooled investment products. 

The main Stock Exchanges 

As most public companies make use of their local stock exchanges as a platform to publicly list their company for capital gains, see below a selected few that are also offered by AvaTrade, stated with the region you can find them in. These are national exchanges that also act as secondary markets. 

Main Stock Exchanges 

Local Stock Exchange	Region	Public Listing
New York Stock Exchange	New York, United States of America	Dow Jones Industrial Average  S&P 500
NASDAQ	New York, United States of America	Nasdaq
London Stock Exchange	London, England	FTSE 100 Index  FTSE 250 Index  FTSE 350 Index  FTSE SmallCap Index  FTSE All-Share Index
Borsa Italiana	Milan, Italy	FTSE MIB  FTSE Italia All-Share  FTSE Italia Mid Cap  FTSE Italia Small Cap  FTSE AIM Italia
Japan Exchange Group	Tokyo, Japan	Nikkei 225
Hong Kong	Central, Hong Kong	Hang Seng Index
Frankfurt Exchange	Frankfurt, Hesse, Germany	DAX  DAXplus  CDAX  DivDAX  LDAX  EuroStoxx 50  MDAX
Shanghai stock exchange	Shanghai, China	SSE 50 Index  SSE 180 Index  SSE 380 Index  SSE Composite Index
Euronext	Amsterdam, Netherlands	CAC 40  PSI 20

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Investing in stocks 

Besides the obvious – investing in a certain company’s stocks and trading – there are several alternative ways to trade, and one should take care in establishing a strategy, with the possibility of making a profit with a company’s shares as an investment choice. 

Value Investing 

This is a simple investment strategy, where certain stocks that are selected trade for an amount that is less than their inherent (underlying asset’s) value. These types of investors (value investors) actively seek out undervalued stocks as they believe they will see returns on these listings. This type of investing does not require you to have a background in finance; however, an understanding of trading and basic finance knowledge is recommended when entering any trading or purchasing of stocks. 

Price-Earnings Ratio 

P/E Ratio, as it is better known is defined as a company’s measure on its current share price relative to its per-share earnings. This is how they calculate the price-earnings ratio: 

By taking the stock price of the company and dividing it by is earnings per share (EPS) = market value per share. The P/E ratio is a dollar amount that a trader can expect to invest in a company in order to receive one dollar of that company’s earnings. 

Dividend paying stock 

Dividends are a way for companies to reward shareholders for owning stock in their company. Dividends are generally paid in cash on a quarterly basis and can become a steady payment if the investment taken is fruitful, and this can generate another opportunity in itself to purchase additional stocks. 

This is a longer-term investment with lower risk, as these companies are generally more financially stable; and over time, dividends rise, and they are committed to dividend payments on their companies’ stocks. 

Shares Trading 

Swing Trading 

Swing trading has become a very popular way to trade in the short-term when trading on stocks and options. Lasting less than one day, generally, a swing trader’s positions can last up to two weeks. When swing trading, the goal is to identify the overall trend, ‘swing in’ and capture the gains while the market is on a trend. The use of technical analysis is advantageous when swing trading to monitor quick market changes as and when they happen. 

Day Trading 

Speculating on a buy or a sell of a particular share or derivative that takes place strictly on the same day. Positions can be opened the second markets open or throughout the day; however all positions must be closed before the market closes for that trading day. Traders who use this trading strategy are known as day traders. 

Depending on the type of trader you are should determine your trading technique. Trading in the short term will have more profit as well as risk of potential loss. It is fast and trades are entered into and exited in a short period of time. 

Trading Stocks with AvaTrades

Trading stock derivatives is made simple with AvaTrade, as we offer access to hundreds of popular global stocks. You can benefit from our outstanding support in your language, as well as the peace of mind in knowing that you will be trading on a secure trading platform and all trader funds are held in segregated accounts in international banks. 

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