Understanding Stock Markets For Beginners Part One

"What is the deal with stock markets?" you may ask

. Well, let's start with a definition. A stock market, also known as an equity market, is a public market that is used to trade company stock and derivatives at an agreed price. Unlike a flea market, which would be a physical place you could go to in order to buy and sell goods, the concept of a stock market is a bit more esoteric. Some stock markets, like the NASDAQ are virtual listing exchanges where all the trading is done through a computer network.

Before we go any further, a let me give you a few basic facts on stocks and derivatives. Stock represents a portion of ownership in a company, and when a company sells shares of its stock it is literally selling this shared ownership. Shareholders, companies or people who own one or more shares of stock in a companies, get special privileges, depending on the class of stock that they own. Shareholders who own common stock get to vote on important business matters when it comes to the company. Shareholders who own preferred stock must be paid company dividends first before anyone who owns common stock.

Derivatives are defined as any sort of financial instrument that depends on the value of its underlying stock. One example: a stock option is a derivative. A stock option might be the option to purchase stock in the future for a fixed price, or sell it in the future for a fixed price. If you have a stock option to purchase stock at a fixed low price, and the value of the stock you have the option for is high, this could be lucrative. If you have the option to sell stock at a fixed high price, and the value of the stock plummets, again, this option becomes more lucrative. So, now you can see that the value of the stock option you have is derived from the value of the stock that it is based on.

With stock markets, the stocks are traded and listed on stock exchanges which were put together by a mutual organization or corporation that focuses in the business of bringing buyers and sellers together. The biggest stock market in North America is the famous New York Stock Exchange.

Those who participate in the stock market range from small time, individual stock investors to big time hedge fund traders. A hedge fund is an investment fund that is open to a range of investors that will take on a wider range of trading and investment activities. Usually, an investment manager runs these funds and receives a performance fee for his work. To Be Continued In Part Two.

by: Mallory Megan

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