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The Stock Market: What Is It and How Does It Work?

The stock market represents one of the major asset classes in financial markets and serves as a marketplace where companies can raise funds by issuing stocks, and investors can purchase these stocks to become partial owners of the company.

But how does the stock market function in detail?

The stock market is based on the buying and selling of publicly traded stocks. When a company decides to issue stocks, it sets the issuance price and the quantity of shares that will be available in the market. Investors can then purchase these stocks through a financial intermediary such as a broker or a bank, which will execute the buy order.
Once stocks are listed on the stock exchange, their price can fluctuate based on market demand and supply. In fact, if the majority of investors are interested in buying the company’s shares, the stock price will increase, and vice versa. However, price movements are also influenced by other factors, including the company’s performance (studied through financial statements), general economic conditions (macroeconomics), investor expectations, and current news.
The stock market is divided into different segments, including the primary market and the secondary market. In the primary market, companies issue new stocks and sell them for the first time to the public through an initial public offering (IPO). In the secondary market, on the other hand, investors can buy and sell previously issued stocks.

Additionally, in the stock market, investors can engage in stock trading, which involves buying and selling stocks based on price fluctuations to generate profits.
This type of activity is known as stock trading and can be done in both the short and long term. In this case, we have used the term “trading” in its broader sense, but typically it refers to a short-term time horizon, while those with a long-term time horizon generally use the term “investments”. However, these topics will be addressed in future lessons.

The significance of the stock market to the global economy is substantial. It enables companies to raise capital to finance their projects and expand their operations. Moreover, the stock market can present excellent investment opportunities for investors who can generate profits by purchasing stocks when their prices are low and selling them when prices rise.

In summary, the stock market is one of the most crucial financial instruments for companies and investors as it allows for capital raising and profit generation through stock buying and selling. Its dynamism is influenced by various factors, both internal and external to the company, and can provide outstanding investment opportunities for those willing to understand its dynamics and adopt a prudent approach to investing.

Other lessons of this course

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