What is stock exchange: Stocks are just another way of saying “shares”. Sometimes it’s called equity too. So, you may see it referred to as the Equity market. But basically, what we buy and sell here is shares of a company.
You see, when a company wants to expand, they can loan money to raise the capital or they can have a private investor (or what we call private placement) or decide to sell a portion of their shares to the public. It’s important to know that not all companies are public so, you can only get to invest or buy shares in their company if you know them and if you have deep enough pockets to buy their shares.
The cool thing is the price of a stock depends on the most recent transaction, not the world market. If there’s a stock called XYZ with current price as the stock market at 4.55, Buyers and sellers will place their Bid and Ask. And if a buyer buys at the seller’s price, the new price of the stock will be according to that transaction. Same thing if the seller decides to sell lower at the rate of bids available. Well, almost none of that happens in the flesh anymore, almost everything is online now.
There used to be brokers where they used to do it in chalk or whatever but right now like you and me, we do it online This is your online broker and this is where you can buy and sell stocks.
How stock exchange Works
Investing seems like a great idea, I mean what could be better than letting your money grow without doing anything. Instead of spending endless numbers of hours in the office hustling, just let your money double or triple by itself. As great as that sounds.
Investing is extremely dangerous and risky and chances that you will lose money are way higher than you will make money. Some of you might say: If I don’t invest my money, inflation is going to swallow it little by little. So, I got to do something.
No, you don’t! That’s way better than losing the money that you worked so hard to earn in a blink of an eye. Let me justify my point. Every company in the market knows that you want to invest and they will do everything possible to convince you that they deserve your money the most.
Most people think that the stock market is a game of numbers but it’s mostly a psychological game. How do you make money in the stock market? You study and analyze companies and find out undervalued stocks.
Because eventually they will rise up to their real value and you make money! However, the problem is, most people buy high and sell low. Because most people invest based on the headlines that they see in the news, but it’s too late already.
The first rule of investing is if everyone is investing, it’s a bad investment. Here is what happens usually! Enthusiast or professional investors start investing a certain stock or a commodity, so the demand naturally drives the price up. When It appears on the news, an average person starts realizing that price is just increasing, it seems like a good investment. first, you hesitate, there is still a shred of doubt in you, but the price is rising right in front of your eyes. So, you convince yourself that you have to take the risk if you want to make money. Hence you invest.
The price keeps rising, you feel happy. but after short-while, the price slightly drops. you don’t pull out because you haven’t lost anything, the price just dropped to the point where you invested, so not a big deal, but it plummets further, you get a bit nervous, but as an intelligent investor, you know you should be patient.
Unfortunately, in the next few days or weeks, the price just keeps plummeting. At some point, you just get frustrated and you pull out before you lose even more money. Isn’t that what happened with bitcoin for example.
Let’s take another example. In March of 2016, Tesla unveiled model 3. Finally, an affordable electric car for everyone. Over 100K people reserved the car in the first 24 hours. It was all over the place; everyone was talking about how model 3 will take over the auto industry. People saw Tesla as the golden opportunity to invest. the stock price was at an all-time high (from230 USD to 380 USD within a year). It looked like a perfect opportunity to invest. So, naturally, most people started investing which drove the price even further, but what is the first rule of investing? Exactly, never invest when everyone is investing. So, what happened is, the stock price crashed and now it’s less 200 bucks (196). The price literally fell by 50 percent. And All these people lost money.
Of course, most people won’t invest in stock exchange now because the stock price is down, but now is the right time to invest! The stock market is much harsher than you think. You are competing against people like Warren Buffet, George Soros who have hundreds if not thousands of people helping them from accountants to specialists. They spend endless numbers of hours figuring out how to take the hell out of you. I am not trying to discourage investing. I just want you to know that you either get really serious about the stock market or for god’s sake don’t waste your money! My fellow friends who invest in real estate always tell me when they hear me such things, I told you, real estate is a better investment. it’s definitely better in some cases, especially if you know what you are doing.