At its core, the stock market functions like a big auction house where buyers and sellers make trades. As the name suggests, the object of these transactions are stocks.
What is a stock?
Like the atoms in a molecule, stocks are the building blocks of a company, when we buy stocks we own a little piece of this company. Based on the performance of a company the value of its stock changes, so the fundamental and simplistic guide to buying stock is choosing companies that we think are profitable and that are growing.
For a company, offering stocks to the public allows it to raise capital to invest in expanding or developing new products. Expansion leads to creating new job opportunities while increasing profits.
How does it actually work?
The stock market follows the basic economic principle of supply and demand. Companies list their stocks on the exchange through a process called an initial public offering (“IPO”), and then investors buy them.
Investors can then buy and sell these stocks on the market as their value changes in an attempt to make a profit. Like an auction house, the highest bid to buy versus the lowest ask to sell will determine the value of a stock, and you, as a shareholder, can take part in this process. Buying low and selling higher, another basic principle of trade is your rule of thumb to make a return on your stock investments.
What is the stock market?
So, the stock market is basically a bunch of people buying and selling little bits of companies based on how much they think these bits will be worth in the future. The stock market in every country has an index, what these indexes do is assess a whole bunch of stock prices and bundle them into one clean number like a score. So, indexes are like stock market scoreboards. If you wanna know how the stock market is doing, you follow what is happening to its index.
Each country has a main index that defines the top companies trading on that exchange.
In the US, the most widely followed indexes are the S&P 500 and Dow Jones Industrial Average. The S&P 500 is an index with 500 of the largest companies in the U.S.
In Egypt, the EGX 30 is the most followed index, it tracks the stock price of the 30 most liquid companies in EGX (that means the 30 companies that have the highest value of transactions in a day)
What drives the value of a stock?
As a shareholder, your stocks can pay off your investment through dividends or capital gains.
Dividends are your share of a company’s distributed profits based on how many stocks you own. More profit for the company means more dividends for shareholders.
Capital gains is the buying and selling of stocks at a profit. Let’s say a new promising tech venture is launching, and the stock price is USD 100. You buy 10 stocks for USD 1,000 and 6 months later these stocks are valued at USD 1,500. You sell, you make a profit. As simple as that.
It really isn’t as complicated as they make it seem in the movies. By following the indexes, news and learning from other seasoned investors, you can put yourself on the path to financial freedom.