Beginner's Guide to Stock Investing | Step into the Stock Market and Understand What Stocks Are?

TradingKey - In this chapter, we delve into the stock market, learning the basics of what stocks are and how the stock market operates.

Stocks are essentially a financial instrument that represents your ownership of a portion of a company's assets and earnings. In simple terms, when you buy shares of a company, you become one of its "little bosses"!

Suppose a company issues 1,000 shares of stock and you purchase 100 of those shares; this means you own 10% of that company’s equity.

This entitles you to enjoy a portion of the company's profits (like dividends) and even gives you voting rights at shareholder meetings to participate in significant decisions.

However, it is important to note that although you are a shareholder, you cannot directly demand that the company return your investment funds. If you wish to exit, you can sell your shares to other investors through the stock market.

What Is the Role of Stocks?

For companies, issuing stocks is one way to raise capital. By dividing ownership into standardized "shares," companies can attract more investors to support their expansion and development.

For you, stocks not only serve as an investment tool but also allow for profit through buying and selling price differences or enjoying dividend income from long-term holdings.

The stock market is like a large "trading bazaar" where you can buy and sell stocks of companies and other securities.

The stock market mainly consists of the Primary Market and the Secondary Market.

The operation of the stock market resembles a vast and complex financial maze, encompassing multiple key aspects from stock issuance to trading, clearing, settlement, and regulation. Each component plays a unique role in ensuring the efficient functioning and fairness of the market.

Who Are the “Players” in the Stock Market? What Do They Do?

Companies

Companies are the "stars" of the stock market; they raise funds by issuing stocks.

These funds can be used for crucial purposes such as business expansion, research and development innovations, and debt repayment.

Investors

Investors are “players” like you.

Whether individual investors or institutional investors (such as pension funds, mutual funds, etc.), everyone’s goal is to obtain returns through buying and selling stocks.

Brokers

Brokers act as your "assistants," providing channels and services for buying and selling stocks. When you decide to buy or sell a particular stock, brokers help execute your trade orders.

Exchanges

Organizations such as the New York Stock Exchange (NYSE) and NASDAQ are dedicated to providing a well-organized and regulated market environment for stock trading, ensuring that transactions occur in an orderly and efficient manner.

Initial Public Offering (IPO)

When a company has funding needs, it collaborates with intermediaries such as underwriters (usually investment banks) to determine details regarding stock issuance based on its plans and funding requirements.

Then, companies and underwriters present their case to potential investors through roadshows to introduce corporate information. They determine the offering price by soliciting bids from institutional investors.

Finally, in the primary market, underwriters sell shares to investors on behalf of companies seeking financing for operations.

Trading Process

Once a stock is listed, it enters the secondary market, available for investors to buy and sell freely.

• Placing Trade Orders:

When you decide to buy or sell a particular stock, you can place your trade orders through a broker.

You can choose different types of orders, such as market orders (executed immediately at current market prices) or limit orders (executed within a specified price range).

• Matching Trades:

Securities exchanges match buy and sell orders based on the principles of price priority and time priority.

In simple terms, higher bids from buyers and lower asks from sellers are matched preferentially.

• Price Fluctuation:

Stock prices are driven by supply and demand.

If there are more buyers than sellers, stock prices will rise; if there are more sellers than buyers, prices will fall.

Additionally, factors like company performance, industry trends, and economic data can also affect investor decisions and subsequently influence stock prices.

Clearing and Settlement Process

After a trade is completed, how do we ensure that both parties fulfill their obligations?

The clearing and settlement process in the stock market is a vital step to ensure that transactions are smoothly completed.

It involves the transfer of funds and securities to make sure both buyers and sellers can meet their respective obligations.

• Clearing:

Clearing institutions calculate the balances of funds and securities for both parties involved in a transaction, confirming the specific amounts and quantities of trades.

• Settlement:

Settlement typically follows a "T+1" system, meaning that funds and securities are exchanged on the next business day after trade completion.

This process is automated by specialized clearing institutions to ensure security and reliability in transactions.

Regulatory Process

The regulatory aspect of the stock market is an essential component to ensuring fair, just, and transparent market operations. Regulatory agencies are responsible for protecting investor interests, maintaining market order, and promoting healthy development in capital markets.

In the United States, the primary regulatory body for securities markets is the Securities and Exchange Commission (SEC). In the UK, it's the Financial Conduct Authority (FCA). In China, it’s the China Securities Regulatory Commission (CSRC).

The existence and functioning of regulatory agencies are crucial for maintaining healthy markets and investor confidence. They establish rules governing behavior among market participants while imposing penalties for violations.

Securities exchanges are the core hub of financial markets and play a significant role in modern economic systems. They serve as centralized trading venues for securities, connecting companies with investors, facilitating capital flow, and enabling resource allocation.

Providing Liquidity

How do securities exchanges make your money "move"?

One important function of a securities exchange is to provide a public trading platform for securities, enhancing their liquidity.

In other words, you can buy or sell stocks at any time, converting your investments into cash. This not only benefits investors like you but also has profound implications for the entire economic system.

From a broader perspective, the existence of securities exchanges promotes capital circulation, helping societal savings to be transformed into investments and invigorating the real economy.

Achieving Price Discovery

Price discovery is another key function of securities exchanges. Simply put, it helps investors find the "fair value" of assets through market supply and demand dynamics.

When investors buy and sell stocks based on their own judgments, the interplay of supply and demand ultimately determines prices.

This price discovery mechanism not only reflects the current value of assets but also provides a basis for your investment decisions.

Optimizing Resource Allocation

Securities exchanges can guide capital toward more promising companies through price signals and market mechanisms.

This is akin to a "sieve" that distinguishes high-quality companies from poorly performing ones.

High-quality firms typically attract more investor attention, gaining more financing opportunities for expansion and development. Conversely, underperforming companies must improve management practices to regain market trust.

This mechanism aids in optimizing resource allocation and promotes industrial upgrading and economic development.

For example, quality firms in the renewable energy sector can grow rapidly through capital markets, creating greater value for society by directing funds toward outstanding enterprises.

High-quality firms find it easier to finance expansions while poorly performing ones need to enhance management practices to drive industrial upgrades.

Information Disclosure

Information disclosure is one of the essential responsibilities of a securities exchange.

To protect investor interests, exchanges require listed companies to regularly disclose financial statements and other significant information such as earnings performance, debt levels, management changes, etc. The aim is to ensure that investors have access to adequate information as a strong basis for their investment decisions.

At the same time, exchanges themselves provide various types of information including market data, trading volumes, and price trends that help investors better understand market movements.

Strengthening Information Regulation

To make markets fairer and more transparent, securities exchanges implement strict information disclosure systems for listed companies while monitoring violations.

If a company is found concealing information or manipulating the market, the exchange will impose penalties on them or even delist them.

Strict regulation not only curbs illegal activities but also boosts investor confidence. After all, you are more likely to invest funds in an environment that is equitable and transparent.

Supporting Corporate Development

For companies, going public is not just a means of fundraising; it also presents an opportunity to enhance competitiveness. By becoming publicly listed entities can acquire substantial funding necessary for growth while leveraging market norms to improve corporate governance structures.

Stock exchanges can be categorized based on various criteria:

• By Trading Method:

• By Transaction Type:

• By Organizational Structure:

• By Region:

• By Technology Level:

Stock exchanges are indispensable to modern financial systems, playing a critical role in economic stability and growth. As financial markets evolve, stock exchanges will continue enhancing their functions, driving greater value for economies and investors alike.

Now that you've learned these basics, are you ready to start investing?