17 FAQ to Fully Understand Stock Exchange Trading

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FAQ Stock Exchange Trading
Stock Exchange

What is the stock market?

The stock market is a set of markets and exchanges where the issue and sale of stocks, bonds and other types of valuable assets, as well as their official exchange, takes place. The stock market is one of the most important components of a market economy. Because, with it, companies gain access to capital, and investors share their own in various projects.

With the ubiquity of the Internet, access to trading in the stock market has been greatly simplified and today almost everyone can work with it. You just need to open an account with a brokerage company, replenish it, master the theoretical basics, install simple software and you can start bidding.

What is a stock exchange?

A stock exchange is a trading platform where securities and their derivatives are traded ( stocks, futures, options ). The main objective of the exchange is to build a transparent and fair market for trading financial instruments.

A vivid example of such exchanges is the London Exchange, the Moscow Exchange, the New York Exchange, etc.

Another important factor is the neutrality of the organizers of the exchange about bidders. For all parties to fulfill their obligations, there is a regulator on the exchange, which, most often, is a state structure. There are sites on which the regulator is absent, or performs a nominal function. These exchanges include FOREX and cryptocurrency exchanges.

Separately, there are commodity markets where bidders not only try to make money on the difference in prices but also satisfy their real needs for a particular product.

Today, exchanges perform one of the most important roles of redistributing resources and financial resources in a market economy.

How are deals made on the Stock Exchange?

Trading is conducted based on a double auction. On the one hand, a line of buyers’ offers is being built, on the other, sellers. As soon as one of the sellers considers the buyer’s advanced price acceptable, he makes a deal with him. The same thing happens in the opposite direction. After the transaction is concluded, the seller disposes of the asset, and the buyer receives it at his complete disposal with the transfer of ownership.

In the stock market, the number of securities traded is limited. The issuer issued a certain circulation of shares, and some of them went to the stock exchange. Additional shares will appear only after the organization decides to expand their issue. The same goes for bonds.

Futures and options contracts are a little different.

The actual issuers at the time of the transaction are the players themselves. This example works with futures. The seller and the buyer conclude a deal, according to which on day None of them will buy and the other will sell the underlying asset. Precisely because fixed-term contracts ( with a limited period ) do not have a limited edition and are created instantly, the trader does not pay a commission to the broker for a loan in case of trading with leverage or opening a short. The broker does not need to lend something.

What are derivatives?

Derivatives are derivatives, the price of which is based on the value of other assets. That is called basic assets ( stocks, currency, goods ).

The most common derivatives include futures and options. CFD contracts and forwards, which are more related to the FOREX market component, are a little less popular.

Settlements for such assets are carried out in the future. At the same time, the price of the instrument will change after the price of its underlying asset ( if the stock futures, the futures price will repeat the stock chart ). There are derivatives that in their pricing have several basic tools at once. Purchasing derivatives usually require a much lower amount of cash (approximately 10% of real value).

Can an individual trade on the Stock Exchange?

Individuals do not have access to trading on the exchange. There should always be a broker ( intermediary ) who is a professional bidder and has the appropriate license from the central bank or other controlling organization.

In fact, working in the market, an individual has complete freedom of action with all financial instruments and is limited in transactions only by the charter of his broker and the legislation. On the legal side, all transactions are made by the broker himself, performing the instructions of his client. In addition to individuals, legal entities are actively working on the exchange. Recently, more and more organizations are using the foreign exchange market to convert their assets, bypassing bank exchanges.

What are the futures on Stock Exchange?

Futures is a contract for the supply of a specific underlying asset at a specific time.

The futures buyer agrees to purchase this underlying asset from the counterparty by the end of the term of this security. The seller, in turn, agrees to sell this asset. Initially, futures were used as an insurance tool, but now they have become extremely common among speculators due to low commissions from transactions with them. However, it is still a very profitable tool. It works as follows.

Suppose you are a producer of oil. It will take some time for you to sell this product. Even perfect logistics will not allow you to sell raw materials instantly. At the same time, the price varies all the time, and not always in your direction. As a producer, your task is not to sell oil at the maximum rate, but to cover the cost of production and generate some profit in excess of annual inflation. At this point, futures come to the rescue. Let’s say that the current price is quite adequate and suits you.

But after all, as long as there is a buyer, while a deal is concluded, the price may change, right? At that moment, when black gold only filled the tank of the enterprise, the producer can sell several hundred oil futures in an instant, in proportion to the extracted raw materials. After that, it does not depend on market fluctuations. If after the sale of oil starts to fall in price, you will receive a profit from the sale of futures equal to the value of this fall. If growth begins, the futures will show a loss that will cover the sale of real raw materials at an increased price.

How much money do you need to trade on the Stock Exchange?

The amount of money for the initial deposit depends on the conditions that the broker offers the client. The minimum amount is limited by the cost of a lot of the cheapest instrument on the exchange. Technically, it is in no way limited. Such capital may be suitable for training. After opening an account, the investor can start up the amount of money that he considers necessary ( starting from one cent and pumping hundreds of millions of dollars ). For the comfortable implementation of trading strategies and the preparation of investment portfolios, it is considered optimal capital in the region of 5,000 – 10,000 dollars ( or their equivalents ).

What are bonds?

Bonds are a form of lending through securities. When issuing bonds, the state, or a commercial organization, seeks to attract free cash to cover its own needs. A certain percentage is due to the bondholder, which is his income.

This is a relatively conservative financial instrument that allows you to receive a fixed income on a par with a bank deposit. Bonds can be quoted both in the issuer’s national currency ( for the Russian Federation it is rubles ) and in foreign currencies ( Euro bonds – USD, EUR, etc. ).

What are commodity markets?

Commodity markets are trading floors that provide the opportunity to buy and sell physical goods, most often raw materials. Such markets are interesting for manufacturers who can always sell their finished goods or purchase raw materials for their production. Also, these exchanges have a pricing function. Many retailers traditionally focus on market quotes for their goods on the stock exchange.

What are Eurobonds?

Euro-bonds are securities that inherit the mechanics of ordinary bonds but are denominated in foreign currency, most often in US dollars and euros. Such assets will be of interest to those who seek conservative foreign exchange earnings. The issuers of such securities are a variety of enterprises and even the state.

How much can you earn on the Stock Exchange?

With proper luck, a trader can earn an unlimited amount of interest on his deposit. However, relying on chance, one can very easily lose one’s capital. If we talk about stable earnings, a novice trader should be able to at least catch up with the key rate and inflation. On the Russian market, a yield ahead of a bank deposit is already considered good (30% annul). We are talking about stable income in the stock market. In the foreign exchange market, it is 50-100% annul. Many emotional investors earn 300-400%, and even a month, especially if you take FOREX and CFD. They exist at best for several months, and ultimately, the concept that gave them huge income in the short term will stop working.

What is an option?

An option is the right to sell or buy some underlying asset in the future ( stocks, currency, futures ). This is a pure derivative, which is a kind of future. Only in this embodiment, the buyer and seller are not required to buy or sell the subject of the agreement but only have the right to do so. Roughly speaking, this is a pass to a private club, where you can make money. Moreover, at the time of receiving the ticket you still do not know this for sure, but the closer the day it takes place, the clearer you see if this trip promises you a profit. In the end, you can decide for yourself whether you should go there or not.

In total, you can make 4 types of transactions with the option:

  1. Buy call option.
  2. Buy put option.
  3. Sell ​​call option.
  4. Sell ​​put option.

The option itself costs a certain premium, which the buyer pays the seller. Accordingly, the seller receives this premium as his income.

It is worth buying the call option if the trader is confident in the subsequent growth of the asset.

It is necessary to buy a put option if the investor predicts a fall.

The put and call option should be sold if lateral price movement is expected.

Options are extremely complex instruments that are used exclusively by experienced traders in their arsenal. Such assets belong to the last stage of stock market research.

What assets can I buy on the stock exchange?

The variety of instruments on the exchange is limited only by the imagination of the organizers of this site. Quite traditional assets are represented in the Russian Federation, such as stocks, bonds, mutual funds, currency, futures, and options. The leading commodity exchanges circulate such commodity assets as grain, oil, electricity, gold, silver, platinum, nickel, copper and other goods in demand.

The most liquid remain instruments such as currency and indices. Developing financial instruments include crypto-currency and electronic money.

In the United States, even futures for weather and heat are traded during peak hours of thermal power plants.

Who is a shareholder?

This is a private person, company or other institution that owns at least one share of the company and receives its share of its income.

Who is a trader?

A person engaged in the purchase and sale of financial assets in any financial market (both for himself and on behalf of another person or institution). The main difference between a trader and an investor is that investors work in the long run, while traders tend to hold assets for shorter periods to exploit short-term trends.

Traders are divided into categories

Scalpers

Scalpers acquire valuable assets at the asking price and then they try to sell them at the asking price.

Swing Traders

Swing traders benefit from market fluctuations by investing in liquid stocks and keeping a position open from several hours to several days.

Day Traders

Day traders carry out transactions within one day. Their main instrument is securities with high liquidity and volatility.

Positional Traders

Positional traders earn on trends that can last from a few days to months. The bottom line is to keep a deal open only as long as it brings money.

How much can you earn on the exchange?

Even buying a few stocks on saved money (subject to growth) for a couple of years, you can get good dividends. In this case, the cumulative effect works – if you do not spend your earnings right away, but skillfully reinvest it in the purchase of other shares, then the amount of profit will grow more rapidly.

What is a stock index?

A stock index is a combination of the value of several shares ( usually 10-500 ), which reflects the general dynamics in the market. Indices can be divided into industry, currency and technical. They are designed so that the investor can understand the direction of the market, looking at only one total value, without exploring dozens of individual price charts. The most famous indices are American S&P 500 ( 500 enterprises ), Dow Jones ( 30 enterprises ), domestic RTS ( 50 enterprises ), Japanese Nikkei 225 ( 225 enterprises ), Chinese SSE ( 1075 enterprises ).

Most liquid indexes have CFDs , futures and options that allow you to earn on changes in these trading indicators

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