There is a lot of chatter about the stock markets as some of the popular indices in the world are trading at or near all-time highs. For the past year, an increasing number of retail traders have joined the financial industry, aiming to take advantage of the volatility using derivatives such as CFDs.
Some concerns related to a slowdown in global growth are now emerging on the back of rising COVID-19 cases and diminishing fiscal support, which could create an environment where stock markets start to head south as well. Regardless of the outcome, there is an audience wanting to know the basics of how the stock market works and this article will provide more clarity.
What is the stock market?
The stock market is a place where private companies can go public. Basically, these entities sell shares to raise funding and once that’s done, the stock becomes liquid, its price fluctuating depending on several important factors.
At the same time, public companies need to comply with regulatory standards and release details on their activity (balance sheets, income statements, earnings, etc.) on a regular basis (once a quarter).
Using the stock market, companies can raise funding and continue to expand their activity, while retail traders and institutional investors can take advantage of price movements. Learn more about stock markets through a professional like The Motley Fool.
Why do prices move?
Due to the usage of trading apps like easyMarkets, there is a stronger involvement from the retail side in the stock markets. Also, the abundant liquidity in the financial sector has facilitated a rally that continues to expand, despite several setbacks along the way.
All this means is that stock prices change based on demand and supply. When market participants are confident in a stock or other financial instrument listed, they choose to buy, and as the demand increases, so does the price.
In the opposite scenario, deteriorating risk sentiment, poor earnings, or other negative news can put pressure on a stock price, because in this case, demand is dropping while supply is increasing as market participants liquidate their exposure.
Initial Public Offering (IPO) is a popular method used by companies to go public. This is a form of equity financing, where a percentage ownership of a company is given up by the founders in exchange for capital, as opposed to debt financing, in which entities issue debt to raise capital to conduct their daily operations.
Recently, direct listing is another method used by private companies to become public, mainly because it cuts out the underwriter and the fees that come with it. In this case, existing shares are offered to the public, as opposed to new ones being issued (as is the case with an IPO). UiPath is one of the notable names that used direct listing in 2021 and thus far, the stock has had a positive performance.
The bottom line
To conclude, the stock market is a place where companies can become public, while also following strict guidelines and operating transparently. Retail traders can take advantage of the price movements of stocks listed, aware that there are risks involved and they need to have proper knowledge and techniques.