Are you scared of buying and selling shares in the stock market?
Is that because you don’t know what a stock market is?
Is lack of knowledge in this area one of the things holding you back from getting started investing in shares?
If it is then go ahead and watch the video below, right now, to hear a simple explanation of what a stock market is:
What Is A Stock Market?
Firstly, a market is somewhere where you can go to buy something or to sell something.
So a market is somewhere where buyers and sellers congregate and they make their trades by buying, selling, swapping or exchanging something.
A stock market then, is a place where you go to trade stocks.
What Are Stocks?
Stocks are one of two things. They are either bonds or shares.
What Is A Bond?
Bonds are IOU’s.
So if I wanted to buy some bonds, I would go to a stock market and buy some bonds from either:
- a bank in the form of a savings bond;
- a Government in the form of a Government bond or GILT as they are sometimes called;
- a company, in the form of a corporate bond.
Say I want to buy a single block of bonds for $1,000 or £1,000.
Then I am investing money in a bank, a company or a Government and they give me a modern form of IOU.
In return for me lending them money, they pay me interest on the bonds and normally there is a future date for the bonds when the IOU will be reversed and I get my money back.
That’s not always the case, but more often than not it is.
In the meantime, as the bondholder, the second advantage of the market is that I can trade my bonds with other people.
I could sell my bonds to another investor, or I could have bought my bonds from another investor who had previously got it from a bank, a Government or a company at the time it was initially issued on the primary market.
What Is A Share?
The other form of stocks are shares and these are small pieces of companies.
So if I’ve got a company and I want to raise money on a stock market, I would go to the stock market and I would float either the entire company in the form of an IPO (Intial Public Offering) or I would issue new stock, new shares, to the market.
So, in this case, I am using the primary aspect of the market to raise new funds.
Of course, having issued those shares to new investors, those share investors need a method of trading those shares, selling them on to other investors as the share price changes.
That’s the secondary aspect of the stock market that allows investors to buy and sell shares on the secondary market as opposed to on the primary market.
So in summary then, a stock market is a place where you can go to trade stocks i.e. bonds and shares and a stock market has a primary market and a secondary market.
The primary market is where new shares and new bonds are issued by the primary issuer, that is the company, the Government or the bank and then it has a secondary market where those investors who bought the bonds and shares in the primary market can sell them on.
Of course, as an investor, you have a choice.
You can buy shares or bonds at the initial time of issue in the primary market and/or you can buy those shares in the secondary market.
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