An introduction to the stock market
January 27th, 2010If a company is lasted on the stock exchange then it means that anyone can buy or sell shares in that company and become an part of the ownership for the time that the stock is owned. The stock exchange acts as a clearing house for the sale and purchase of shares in publicly traded companies and is accessed by brokers who act on behalf of clients in making the trades.
A list of publicly traded stock can be found in the financial pages of the main broadsheet newspapers (e.g. The Times, Financial Times) along with their current bid price (the price that you would sell stock for) and the offer price (the price that you would but stock for. The spread between the bid and offer price is the brokers margin.
Large companies, such as BP or HSBC, would have a very small spread since their stock is sold in very large blocks at any time. Stocks in smaller companies would have a larger spread since these are traded less frequently and in smaller blocks.
Stocks are traded on either the main market or on the Alternative Investment Market (AIM). Stocks in AIM tend to be smaller companies or newer listed companies that are striving towards a full market listing. In either case, you can buy and sell stocks in these companies as easily as those on the main market.
In addition to buying and selling stocks listed in the stock exchange, many brokers now have access to the major stock exchanges around the world and can purchase shares in companies listed there. For example, one can buy shares in Coca Cola in the US through a UK brokerage.
Many brokers now offer online trading sites where you, as an individual, can place orders to buy and sell stock. You will need to have the funds to buy the stock and there will be a brokerage fee per transaction to pay. Larger companies may offer an advisory service but many are `execution only` meaning that they act as a platform for trades with no advice on the stock or portfolio you may have. Transaction fees can be as low as £8 for regular traders.
As an owner of a share you will be entitled to any dividend that the company pays to its shareholders. If a UK company pays a dividend it may do so twice a year (for the larger ones) or once per year. The amount of dividend paid depends on the companies financial performance but can outstrip bank deposit account rates. US companies, for example, pay dividends up to four times per year. The last rate of dividend payment can be found in the financial press listings or any of the online share tracking services.
The value of shares can go down as well as up so you either need a long term view on a company or may be a short term `day trader` looking to optimise movements in share prices over a short period of time – maybe hours to days.
Selecting stock is a personal preference and there are many advisory sites that can help with your decision making. Many advise spreading your investment between many stocks so as to reduce the risk of one failure wiping out your investment. Likewise, you may wish to choose between industries in traditionally defensive sectors (such as supermarkets and utilities) that offer limited downside (or upside) through turbulent economic times.
Investing in stock is only for those with capital that they are prepared to lose although any gains can be significant too! Trading in stock is certainly not an ideal debt solution mechanism but if you are wise and/or lucky then it could help!