Although equity trading has been around in one form or another for centuries, new as well as experienced traders don’t always understand exactly how stock markets work, or what mechanisms make them tick.
The rules of the game have not changed over the years. There are more markets, and they are bigger than ever. Computers have cut the time of trade execution down to a millisecond, and new companies continue to list themselves on various foreign exchanges. To grasp the concept of what stock trading is all about, we can break down the process into small details, and then we can see that it is not really as complicated as we envision.
Borrow or Share
When a company needs to raise money, it has two choices – the owners can take out a loan from the bank, or it can offer people a share in the business in the form of shares. As a ‘shareholder’ you own a piece of the business along with many other people. You are a part owner of the company with an entitlement to all assets, and all monies earned.
Unfortunately, owning shares does not entitle you to a say in what happens in the running of the company. From time to time, large corporations hold meetings where shareholders can vote on the election of members of the board of directors, or on specific changes in the structure of the entity. Usually, individual votes have little weight in these issues especially if the number of shareholders is great.
The ownership structure of the company is what contributes to the value to a stock. If stock owners didn’t have a claim on earnings, then stock certificates would be worth no more than the paper they’re printed on. Investors understand that as a company’s earnings improve, the price of the stock goes up. And that is precisely the nature of stock trading.
10% Average Rise
After the New York Stock Market Crash of 1929, the price of stocks started moving upwards. Despite many panics and crashes over the years, the average large stock has returned close to 10% a year. However, as with all investments, there are no guarantees. If you stay with large companies that have been around for a good period of time, you have a fairly good chance of coming up on top – if you don’t sell out the moment the stock takes a dip. That is how people end up losing their money. Instead of waiting out the drop in the market, they pull out before the stock has a chance to recover.