The stock market is a fascinating and complex world that can be intimidating to those unfamiliar with it. However, for anyone interested in investing, it is important to have a basic understanding of how this market works. In this article, we present the 10 fundamental concepts you need to know about the stock market. From the definition of a stock to the importance of technical analysis, these concepts will help you better understand how the stock market works and how you can invest in it with confidence.
Concept 1: What is the stock market?
The stock market is an organized system that allows the purchase and sale of securities issued by companies or government entities. These securities can be stocks, bonds, treasury bills, among others.
The purpose of the stock market is to provide a space where investors can acquire these securities and obtain a return on their investment. In addition, it also allows companies to obtain financing for their projects through the issuance of these securities.
The stock market is regulated by government agencies and financial entities that ensure transparency and security in the transactions carried out in the market.
Concept 2: How does the stock market work?
The stock market is a system in which shares of public companies are bought and sold. Shares are securities that represent a proportional part of the capital stock of a company, i.e., whoever owns them has a small ownership in the company.
The stock market works on the basis of supply and demand. If there are many people interested in buying a company's shares, their price will rise; if there are many people interested in selling them, their price will fall.
Transactions are made through financial intermediaries, such as stockbrokers or banks. These intermediaries charge a commission for their services.
The stock market can also be influenced by external factors, such as the country's economy, political events and important business decisions.
Concept 3: Stocks
Stocks are securities that represent a proportional share of a company's capital stock. When you buy shares, you become a shareholder and are entitled to participate in important company decisions, as well as to receive a share of the profits generated by the company.
The value of shares can vary according to supply and demand in the market. It is therefore important to carry out a preliminary analysis before investing in a particular company.
There are different types of shares, such as common and preferred shares. Common shares have voting rights at shareholders' meetings and receive dividends according to the profits generated by the company. Preferred shares do not have voting rights, but have preference in the payment of dividends and in the event of liquidation of the company.
Investing in shares can be a good option for investors seeking long-term profitability, but it is important to keep in mind that it also carries a higher risk than other financial instruments.
Concept 4: Bonds
Bonds are debt securities issued by companies or governments to finance their projects. When you buy a bond, you are lending money to the issuing entity and in return you receive interest for the duration of the loan. Bonds are considered a safer investment than stocks because they have a fixed and predictable return. However, they also have lower earnings potential.
Concept 5: Stock Indices
Stock indices are a tool used to measure the performance of the stock market as a whole or of a specific sector. These indices are created from a selection of stocks representative of the market or sector in question and their value is calculated from the weighted sum of the prices of these stocks.
Among the best known stock market indexes are the Dow Jones Industrial Average, the S&P 500 and the Nasdaq Composite in the United States, the FTSE 100 in the United Kingdom, the DAX 30 in Germany and the Nikkei 225 in Japan.
Stock market indices are used by investors as a benchmark to evaluate the performance of their portfolios and to make investment decisions. They are also a useful tool for financial analysts who study the evolution of the market and make forecasts about its future behavior.
Concept 6: Volatility
Volatility refers to the variability of stock prices in the market. When a stock is very volatile, it means that its price fluctuates a lot in a short period of time. Volatility can be caused by many factors, including changes in the economy, company news or even world events.
Investors should take volatility into account when making investment decisions. While more volatile stocks can offer opportunities for quick gains, they also increase the risk of significant losses. On the other hand, less volatile stocks may offer slower but more stable growth.
It is important to keep in mind that volatility is not always bad. It can indicate that there is a great deal of activity in the market and that there are opportunities for gains if the right decisions are made.
Concept 7: Supply and Demand
Supply and demand are the two main factors that determine the price of stocks in the stock market. Supply refers to the amount of shares that sellers are willing to sell, while demand refers to the amount of shares that buyers are willing to buy.
If there are more buyers than sellers, demand exceeds supply and the stock price tends to rise. On the other hand, if there are more sellers than buyers, supply exceeds demand and the stock price tends to fall.
It is important to keep in mind that other factors can also influence stock prices, such as financial reports, economic news and political decisions. However, understanding how supply and demand works is critical to understanding how the stock market moves.
Concept 8: Primary and secondary market
The primary market is where securities are first issued, i.e., where the initial placement of a company's shares or bonds takes place. In this market, the company obtains the necessary resources to finance its projects and activities.
On the other hand, the secondary market is where securities that have already been issued in the primary market are traded. In this market, investors buy and sell shares or bonds among themselves, without the issuing company participating in these transactions.
It is important to note that the existence of the secondary market allows investors to obtain liquidity, i.e. the possibility of selling their shares or bonds at any time and obtaining the corresponding money.
Concept 9: Broker or stockbroker
A broker or stockbroker is a financial intermediary that carries out transactions for the purchase and sale of securities in the financial markets. Brokers may work for a company or be independent and offer their services through an online platform.
Brokers charge a commission for each transaction they make and usually offer financial advice to their clients to help them make informed investment decisions.
It is important to choose a reliable broker with experience in the stock market to ensure that your investments are safe and get the best possible results.
Concept 10: Technical and fundamental analysis
Technical and fundamental analysis are two different approaches to analyzing the stock market and making investment decisions.
Technical analysis is based on the study of price charts and patterns to determine trends and predict future market movements. Technical analysts use tools such as moving averages, oscillators and trend lines to identify patterns and buy or sell signals.
Fundamental analysis, on the other hand, focuses on the study of economic, financial and political factors affecting a company or industry. Fundamental analysts examine financial statements, competition, government regulation and other external factors to determine the intrinsic value of a company or stock.
Both approaches have their advantages and disadvantages, so it is important to understand them before making investment decisions. Some investors use a combination of both approaches to get a more complete view of the market.
