What is the stock market: a guide for beginners

Before starting to invest, it’s important to know what the stock market is so that you can trade stocks with greater awareness.

Whether you plan to approach stock trading directly, through buying and selling shares, or through derivative instruments such as CFDs, if you understand the basics of the stock market and its mechanisms you’ll be able to make better informed investment decisions.

Here is everything you need to know about the stock market with a comprehensive guide for beginners.

The stock market is a general term used to cover all of the stock exchanges where the buying and selling of listed companies’ shares takes place. You can buy shares on the primary or institutional market, when securities are first issued, or buy and sell them on the secondary market where the trading of securities that are already in circulation takes place.

Nowadays the stock market is a set of fully digitised electronic platforms, as transactions take place online. Investors no longer have to be present at the stock exchange but can invest from anywhere in the world by connecting to the relevant stock market portal.

When people talk about stocks traded on the stock market they usually mean shares in listed companies. These securities represent a small share of ownership in a company that can be traded between investors who want to sell them and other investors who want to buy them. Shares can also pay a dividend, a return that is paid to whoever owns the shares at the time and that can also provide extra revenue on top of the value of the shares themselves.

The stock market includes all the stock exchanges in different countries. For example, in the UK there is the London Stock Exchange (LSE), the London-based exchange founded in 1801 which is one of the most important financial centres in the world by market capitalisation. Companies traded on the LSE make up a number of different indices, such as the FTSE 100, the FTSE All-Share and the FTSE AIM UK 50 Index.

In the United States, the most important stock exchanges are the NASDAQ and the New York Stock Exchange (NYSE), there are also many other exchanges operating within North America. In Europe, there is the Frankfurt Stock Exchange, Euronext Paris and the Italian Stock Exchange in Milan.

Other stock exchanges include the Tokyo Stock Exchange, the Shanghai Stock Exchange, the Hong Kong Stock Exchange, the Toronto Stock Exchange, the Shenzhen Stock Exchange and the Bombay Stock Exchange. As a trader you can buy and sell shares on any stock exchange.

Each stock exchange has its own regulator, such as the Financial Conduct Authority (FCA) in the UK and the Securities and Exchange Commission (SEC) in the US. Each stock exchange must comply with specific rules set by its regulator and is subject to supervision by that regulator, which can carry out checks and issue penalties.

To get a better understanding of what the stock market is, let's look at how it works.  It is an electronic network of stock exchanges where companies list and sell a part of the company on the market through selling shares. A company’s stock exchange listing takes place through an Initial Public Offer (IPO) on what is generally known as the primary market, when the first investors buy the company's shares and can later resell them.

Afterwards, the share price changes according to supply and demand on what’s generally known as the secondary market, so when lots of investors buy shares in a company, their value goes up, whereas when a large quantity of shares in a company are sold, their price goes down.

The purpose of the stock market is to help companies raise money to invest in the growth of the company, while investors look for profit opportunities.

Profit for a stock investor can come from a dividend payment, or from buying stocks at less than the price they eventually sell them at. Profits from selling at a higher price can potentially be made after a few minutes, hours, days, months or years depending on the investment goals.

Stocks in the stock market can be traded directly - by buying securities on the primary or secondary market - or through derivative instruments such as CFDs. In this case, we’re talking about leveraged trading, the usually higher risk and more speculative activity that takes place through the use of financial products whose value depends on the price of an underlying asset (that is, the shares).

CFDs trading allows you to invest in any price direction, either up or down.  You can also invest with a small amount of capital and use financial leverage to increase the return of individual trades. Unlike traditional share trading, CFDs trading favours the short term, with positions being opened and closed even within the same day (day trading).

With FinecoBank you can start investing in the stock market easily, quickly and conveniently. Through our investment services you can trade shares on the world's major stock exchanges or speculate on share price movements with online trading, benefiting from low commissions, state-of-the-art technology and the support of a reliable and solid European bank.