How does the stock market work for dummies

If you are a lover of trading in the financial world, of course, you have heard about stocks, and also the stock market, how does the stock market work for dummies.

If you are a beginner who still does not understand correctly about how the stock market works.

Maybe trading stocks will scarry you because you often hear that more than 50% of stock traders fail.

You are not alone, there are many who have the same concerns out there. Of course, stock trading and forex are different.

When looking from its potential side, forex is more promising than stock, but stock also has advantages compared to forex.

If in forex you can sell or buy or in other words have two ways of opportunity, and market operation 24 hours.

But not on stock, you can only take action Buy first and sell later, and stock market depending on working hours.

The advantage of a stock is the presence of dividends given by the company to shareholders.

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Stock definition and meaning

how stock market works

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Stocks are securities that indicate the ownership of a company.

In other words, when someone buys shares, that person has bought a portion of ownership of the company.

The meaning of shares (stock) also is defined as a unit of value or bookkeeping in various financial instruments that refer to the ownership portion of a company.

When someone buys shares of a company.

That person already has rights to the assets and income of the company with a portion of the shares purchased.

Simply put, a stock is proof of ownership of a company or business entity.

The form of shares, in general, is a piece of paper in which it is stated that the owner of the securities is the owner of the company that issued the shares.

If a person or entity has 100 thousand shares, in a company that has 1 million shares outstanding.

It means that he has 10% ownership in the company.

Shareholders will get dividends that are distributed annually from the company’s profits with a percentage of share ownership in the company.

Dividends are the distribution of profits to the last shareholder based on the percentage/number of shares owned.

Types of stocks

how stock market works

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The types of shares are grouped into two categories in terms of capability in claim rights.

  • Common stock 
  • Preferred stock

Common stock

The definition of common stock is a stock that can be claimed based on profits and losses in a company.

If liquidation is carried out, common shareholders will be the last priority in the distribution of dividends from the sale of company assets.

In common stock, shareholders have limited liability.

In other words, when a company is declared bankrupt then the maximum loss incurred by the shareholder is the amount of the investment in the shares purchased.

The characteristics of ordinary shares are as follows:

  • Common shareholders have voting rights in electing the board of commissioners.
  • Shareholders’ rights take precedence when the company issues new shares.
  • They have limited liability, that is, for the number of shares owned.

Preferred stock

Preferred shares are shares in which the profit distribution is fixed.

If the company suffers losses, preferred shareholders will be given top priority in the revenue sharing from the sale of assets.

Preferred shares have similarities with bonds, namely the existence of claims on profits and previous assets.

Fixed dividends during the validity period of the shares.

And has redemption rights, and can be exchanged (convertible) with common stock.

The characteristics of the preferred shares are as follows:

  • There are several levels that can be published with different characteristics.
  • The preferred shareholder has claims for income and assets, and get a high priority in the dividend distribution.
  • Preferred shares can be exchanged into common stock through an agreement between the company and shareholders.

In terms of trading performance, stocks can be grouped in

  • BlueChip Stocks
  • Income Stocks
  • Growth Stocks
  • Speculative Stock
  • Counter-Cyclical Stocks
  • Emerging Growth Stocks
  • Defensive Stocks,

BlueChip Stocks, which are common stock of companies with high reputation, become market leaders in similar industries, have a stable income, and consistently pay dividends.

Income Stocks, which are shares of an issuer with the ability to pay dividends above the average payment of dividends the previous year. This type of stock can generally provide greater income and routinely pay cash dividends.

Growth Stocks are stocks consisting of well-known and lesser-known ones.

Well – Known is a stock of issuers with high revenue growth, market leaders in similar industries and has a high reputation.

Lesser-Known is shares of issuers that are not market leaders in the industry but have growth stock characteristics.

Speculative Stock is stock from a company that cannot have a regular income every year but has the potential to have a high income in the future, although it is uncertain.

Counter-Cyclical Stocks is a stock that is not too affected by macroeconomic conditions and the general business situation.

The value of these shares can remain high during an economic recession because the issuers are able to get high income so they can provide high dividends.

Emerging Growth Stocks are shares issued by issuers that are relatively small and stable even in unfavorable economic conditions.

Defensive Stocks, stocks that have remained stable over a period of uncertain conditions and recession.

Why should a company issue shares

how stock market works

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Many giant companies that grew from the start of small businesses, take for example Facebook by Mark Zuckenberg, or Alibaba by Jack Ma

To grow, the company needs funding to achieve the goal of expanding its business.

And to get this funding one way is to issue shares.

Some reasons why companies issue shares are.

  • Raising capital
  • Listing shares.

Raising capital

One of the ways companies get funding is by issuing shares, with the aim of raising capital.

Although there are other ways, for example by borrowing from banks or other funding companies, this method provides its own burden.

Because the loan funds will bear interest, so if the company’s performance does not meet expectations, it will burden the overall finance.

By issuing these shares has a lower risk because the company will provide dividends based on the company’s performance to shareholders.

Listing shares

When new companies need capital, they may get funding from traditional bank loans.

But for greater access, the company can change from a private company to a public company by offering an IPO (Initial Public Offering)

Thus this changes the status of the company, the company’s shares can be widely held among investors or the general public.

For the first investor, this IPO is likely to provide good profits, if the company’s performance becomes better.

When a company’s shares are listed on the stock exchange, its value will fluctuate because traders begin to trade these shares.

How company issues shares

how stock market works

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There are two types of issuance of shares by companies/issuers.

  • Initial Public Offering (IPO) and
  • Secondary Public Offering (SPO).

Initial Public Offering (IPO), is referring to as the initial market or initial public offering.

Where for the first time a company offers shares to the public (investors).

This initial shares have limited time but are not subject to commissions.

But that requires intermediary sales agents.

So that if there are investors who want to buy it, then they must place an order with the selling agent.

Secondary Public Offering (SPO), is referring to as the secondary market where company shares have circulated in the market.

Shares that have already entered the secondary market fluctuate because they are affected by market conditions, with an unlimited period of time.

In the secondary market commission also exists, both the stock sale commission and purchase.

To buy and sell shares, the activity must go through a member of the stock exchange (securities company/broker).

What is a stock exchange?

brussels stock exchange

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When companies issue shares, they will look for shares buyers, and buyers of their shares will look for stocks that they consider to be the most potential to provide profits.

To bring together the two parties requires the market, as in traditional markets, while in the stock market as the stock exchange.

Thus the Stock Exchange is an organized market, where brokers carry out trading transactions in shares or securities with various sets of rules and regulations.

Stock exchanges have the same meaning as the stock market.

The exchange or market is a meeting between the seller and the buyer, they can communicate therein.

Usually, the phrase “market” refers to traditional and conventional trade involving products directly.

While the phrase “stock exchange” commonly refers to trades that do not sell products physically.

In the stock exchange, there are four groups that form an important part:

  • Stock Exchange.
  • A public company (issuer).
  • Securities companies as securities traders.
  • Investors as consumers or buyers.

Broadly speaking, those traded on the Stock Exchange are shares or stocks which are proof of ownership of one’s company because they have paid in equity participation.

Then there are bonds that are evidence of long-term capital lending between the issuer company and the obligor or bondholders who buy corporate bonds.

Most in each country have a stock exchange, there are even more than one, but there are indeed some countries that do not have a stock exchange like.

Andorra, Brunei, Chad, Comoros, Marshall Islands, North Korea, Myanmar, Nauru.

How to buy stock?

To start buying shares, you must open a stock account at a securities company (brokerage company or stockbroker).

If your house is close to the stock exchange’s office, you can immediately go there and find a trusted brokerage company.

But if you don’t have access to the stock exchange.

You can register with a brokerage company that provides access to buying and selling of shares.

Usually to register requires supplementary documents to support your registration process.

The ID card, Address information of residence, Job or business information, etc

Maybe different broker different rules, but in general they need the data for the verification process.

Since you get verified at a stockbroker, you can buy shares through their platform, but you must deposit funds according to broker rules.

Usually, there is a minimum deposit to start trading.

Final thought

How does the stock market work for dummies

Stock investment is an investment with lucrative return potential.

But access to start investing in shares is quite complicated compared to forex trading.

In forex trading, there is a lot of ease of access to register and start trading.

Depending on the broker you choose, each offering a variety of trading instruments.

Of course, the more instruments offered will give the impression of giving more freedom to choose which instruments might be the most profitable.

TenkoFX is a broker that also offers a variety of trading instruments.

You can look at the contract specifications to see the details that you can trade.

It also offers Crypto trading, which is currently a lot of speculators on cryptocurrencies.

Open an account or try Demo account

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