Investing 101: How the Stock Exchange Works

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At present, the stock market world has become an integral part of our daily life. But before jumping into the stock market, we need to know what stocks are and how they work on a fundamental level. Understanding how the stock market works is the first step to entering the world of stock investment. Some may have some ideas but can still benefit from learning more. So, let’s understand all of the steps right from the basics.

What is stock?

A stock also referred to as equity or security, represents the ownership interests of a fraction of a corporation. The units of stock are called a share. To elaborate, if you buy a particular share of a company, you own a small portion of the business and contribute to its success. Besides, instead of being private or individual groups of companies, some corporations make their shares public so that anyone who purchases the stock can buy a tiny part of the company.

What is a stock exchange?

By definition, the Stock exchange is a financial platform where the transaction of shares between the buyer and seller occurs. Since digitisation, it is the place that provides a platform with the capacity to match the seller and buyer code. In real-world terms, it may be compared to a shopping complex, except for stocks. The Wall Street in New York, the London stock exchange, and the Tokyo stock exchange are prominent examples.

How does the stock exchange work?

To gain wealth, the trader buys and sells the shares at the exchanges. The profit is calculated by the difference of price- starting from the time of purchase and selling. Thus, understanding how much a company’s stock is worth is a fundamental concept while buying or selling. In the stock market, you can invest in two ways:

Long position

It is also known as the bullish position, where the trader tends to buy a stock and sell at a higher price. For example, suppose you buy 100 shares of a particular company at 5 .00 euros. Then, after one month, you will sell the share at a higher rate of 6.50 euros. And the profit will be equal to the difference in value multiplied by the number of shares. But, of course, if the price goes down, you will incur a loss.

Short position

The short position is called the bearish position, where the trader sells a stock lent by the broker or bank. And then buy it at a lower price and return it to the initial lender. However, in the short position, you can only make a profit when the value of the stock falls. According to the opinion of en.meteofinanza.com, if the price of a particular share drops after borrowing the stakes, the trader makes a profit while returning the stocks. But if the price increases, they will have to buy back at a higher rate to cover the loan, suffering a financial loss in the process.