Last month, I explained what a stock is, giving us the essential concepts to explore the equity market in more detail. We said that the stock market is the place where shares of companies can be traded among different investors, but how exactly does it work? And how can an individual access it?
When a company issues shares, they become tradable on specific markets known as stock exchanges. Almost every country has one or more exchanges, and you’ve likely heard of some of the biggest names: the New York Stock Exchange, the NASDAQ, the London Stock Exchange, or the Singapore Stock Exchange.
The scale of a company typically determines where its stock will be traded: small and medium-sized businesses usually have their shares listed only on their home country’s exchange, while large multinational corporations may have listings across multiple exchanges worldwide.
When we talk about the global stock market, we are referring to the collective sum of all stock exchanges and the publicly traded companies listed on them.
To enter this world of securities, you need an investment account with a bank, broker, or another financial institution. These platforms provide access to a variety of stock exchanges, and the range of available stocks will depend on the specific platform you choose. Brokers also vary in their fee and commission structures, ease of use, and how they handle taxes – so be sure to do your research and choose wisely!
Once you have an investment account, buying and selling stocks is as simple as a few clicks, this process is almost instantaneous, but how does it work exactly?
When you buy or sell a security, you can choose between different types of orders, the most common being market orders and limit orders. The former will execute only at the price you specified while the latter will execute immediately at the best available price.
Once you submit an order, it gets entered into the order book of the stock exchange, buy orders are listed from the highest to the lowest price, and sell orders from lowest to highest. If a buy order matches a sell order at the same price, the trade is executed – and the price at which the trade occurs becomes the new market price for that stock.
Behind the scenes, financial intermediaries called market makers help keep this process running smoothly. By continuously offering to buy and sell stocks, they provide the liquidity needed to ensure that trades are matched quickly even when investor interest in a particular stock is low.
I hope this brief article helped you understand the basics of how the stock market works and how you can access it. But you might now be wondering: why should you invest in stocks instead of putting all your money into other investments, like bonds, real estate, or gold?
I’ll answer that question in the next article of this series – stay tuned!