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Financial Investing 10: What is the Stock Market?

The stock market is a great place for young investors to increase their wealth. This mode of investment is not as risky as compared to investing in futures and Forex. Moreover, you will be able to earn greater returns from stock market investment as opposed to bonds and precious metals.

Here we will provide an easy to understand explanation of the stock market that will be helpful for anyone who has never put money in stock market before. They say that knowledge is power. And this is especially true for stock market investment. The more information you have about the stock market, the easier it will be for you to invest in it.

What is the Stock Market: An Overview

A stock market is a platform for investors to buy and sell shares of companies listed on the stock exchange. Companies offer their shares, or stocks, to the public in order to raise capital to finance their operations. When you buy shares of a company, you become part owner of that particular company. The company distributes a certain percentage of profits, which is called dividends, to the shareholders. Dividends are distributed based on the proportion of shares held by the shareholder in the company. The greater number of shares you have of a company, the more dividends you will be entitled to when the company earns profits from its operations.

Types of Stock Market

Most of the companies list their shares on formal stock exchanges. A stock exchange provides the infrastructure for traders and companies that facilitates buying and selling of shares. There are various stock exchanges around the world. Each country may have different stock exchanges that deals with different types of stocks. Well known stock exchanges include New York Stock Exchange (NYSE), National Association of Securities Dealers Automated Quotations (Nasdaq), Toronto Stock Exchange, London Stock Exchange Group, Euronext, Shanghai Stock Exchange, Deutsche Börse, and CAC quarante (CAC 40).

Some companies decide to offer shares on over-the-counter (OTC) market instead of formal exchanges. OTC markets have less regulatory oversight and transparency as compared to formal exchanges. Companies that do not want to face legal formalities of listing in the formal stock exchanges usually list their shares in OTC market. In this market, the shares are traded through a dealer network instead of a centralized exchange. In order to buy shares from OTC market, you have to register to a brokerage firm.

Mechanism of Share Prices: How Share Prices are Determined?

At this point, you should also know how share prices are determined in the stock market. The price is determined by the demand of investors. Increased demand buoys up the share price, while on the other hand, it decreases when its demand dries up. If price of your share goes up, your shareholder value will also increase. As a result, you will be able to make a profit on your share investment amount when you sell the share.

On a final note, you must know that investing in the stock market involves risks similar to investing in any other investment avenue. It's important that you read personal finance books and articles relating to the stock market investment to ensure that you minimize the risks, and maximize return potential of your investment amount.

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