The stock market is an opportunity to earn money without leaving your home on an ongoing basis, or use it as a side job. However, what is it, what is the difference from the foreign exchange market and what does a novice stock market trader need to know?
Investments and Securities
First of all, it is worth understanding the concepts.
A security is a certain product that fixes the holder's right to own part of a debt obligation or tangible property. Based on this, securities are divided into two large classes: equity and debt. There is another type called “derivatives”, however, by and large they are not securities in their classical concept. Nevertheless, derivatives are essential and affect the economic life of society no less than securities.
A subspecies of debt securities includes promissory notes and bonds, on which the holder will receive a sum of money from any individual or legal entity within the prescribed period. On the other hand, the obligation of the other party to pay a certain amount within the specified period is also fixed in the debt security.
Equity securities are stocks. There are many subspecies of shares, but all have one thing: the share fixes the ownership of the holder of securities to any part of the property in this company or enterprise.
Both types of securities can be sold and bought, that is, changed holders. Thus, they become a product, and any product in the sale process must be evaluated, so each security has its own value, expressed in money. The main difference between them and ordinary goods is the ability to bring extra money. The process of investing in securities is called investing, and the holder of securities is called the investor.
Investments
Trading in the stock market for beginners is impossible without knowledge of the types of investments. They are divided into two types: portfolio and direct. With the direct method of investing, it implies the purchase of a share of an existing or created company with further direct work on the production of services and goods. If an investor invests in the company's shares, but at the same time counts only on a share in the profits and does not take a direct part in the management and work process, this is by definition a portfolio investment. His rights to a certain share of the company are fixed in the form of a certain number of shares that are in his ownership. Portfolio investors buy shares of companies, counting on dividends, that is, on the profit that the company retains after deducting taxes, expenses, deducting planned and made investments. Dividends are distributed among holders of securities according to the share of ownership. An investment portfolio is a collection of various securities.
Stock units
It is necessary to consider the units of investment funds related to equity securities, but still slightly different from them.
Investment funds are companies that do not engage in real business (for example, the construction or production of certain goods). Their purpose is to provide stock market infrastructure. Investment funds facilitate access to the market as many investors as possible. The fund does not have personnel, as in a regular enterprise, but it does have a management company that diversifies the fund’s investments and purchase and sell shares to the public. An investor who invests in a fund's share essentially takes possession of the corresponding part of the fund’s investment portfolio, and entrusts management with other, more qualified people. This is very similar to owning shares in an enterprise, and a share can be sold or bought, like ordinary shares. The unit also gives the owner the right to an appropriate share of the fund’s property.
Essence and meaning
For beginners, the stock market may seem too complicated, so before you start trading, you need to know the basics of the processes and the features of different types of trading.
The entire stock market is divided into primary and secondary. The secondary is further divided into over-the-counter and exchange (organized).
The primary market is the market where various securities are initially placed. It covers the entire first issue of each security and part of subsequent new issues of old securities. In the primary market, companies profit from the placement of bonds and shares, here they finance their own production process. Accommodation can be closed and open.
Types of accommodation
With a private placement, securities are available for purchase only to a previously known circle of investors at a pre-agreed price.
With an open (public offering) securities, any investor can purchase. This type of placement can only be used by enterprises and companies in the form of open joint stock companies (OJSC). The company can place new issues of shares as much as desired, but only in closed form. The first open placement for any enterprise is available only once throughout its existence. Usually this precedes plans for the company's securities to enter the stock market.
Secondary market
The task of the secondary securities market is to change their owners. At the same time, issuers (companies or enterprises that issued shares) in the secondary market do not receive any profit and financing. The stock market has a central place in the stock market, the largest trading volumes take place on its platforms, but the over-the-counter market has an auxiliary value. On the OTC market often traded securities that failed to go to the exchange. Often these are low-liquid securities of regional or new enterprises that are not in great demand.
On the OTC market, all transactions are made without the participation of a broker, directly between the seller and the buyer, which significantly increases the risk of non-payment or non-delivery of securities that are not on the exchange. Due to this, transaction costs increase, and liquidity decreases even more. Thus, the exchange is the most convenient place for various operations with securities. For obvious reasons, this part of the stock market is not the best place for beginner investors.
Only members of the exchange who are licensed participants in the stock market have direct access to the exchange: dealers, brokers, banks with the appropriate licenses (dealer or broker). An investor does not have direct access to the exchange, and can only be accessed through an intermediary - a broker. The broker is engaged in the management of investment accounts of clients, gives them the opportunity to participate in the auction, charging a commission. Also, the broker is responsible to the exchange for the illegal actions of his client.
Exchange platforms
How to start trading in the stock market? First of all, you need to choose a trading platform. In this section of the article, using the example of three specific sites, the general principle of the structure of trade and some differences will be analyzed.
As the stock market develops, the differences between trading floors and exchanges become less and less significant. Consider the world's oldest trading platform - the New York Stock Exchange (www.nyse.com). Trading on this exchange is supported by specialists. A specialist is a bidder who monitors the progress of trading on a particular security. For each security on this site, one specialist is assigned, however, he may be responsible for several securities.
The main duty of this person is to ensure the liquidity of the security. This is done by maintaining bilateral quotes, as well as performing purchase and sale transactions according to these quotes. On the New York Stock Exchange, every specialist needs to maintain a spread (the difference between buying and selling) at a certain level. We continue to consider the features of trading in the US stock market for beginners. How do specialists support the liquidity of securities? The fact is that if there are no transactions for the sale of a security, the specialist puts up and holds an offer for sale. If there are no purchase transactions, a purchase offer is put up and held. Participants in trading on the exchange, organized by a similar principle, see a small part of the whole picture. These are the highest purchase prices, the lowest sale prices and lot sizes. Available information is the price and volume of the last completed transactions.
NASDAQ
Now let's look at another platform, NASDAQ. This is the so-called dealer market. There is no specific specialist who "leads" a particular security, but there are dealers and market makers. Their responsibility is also to maintain bilateral quotes. They put quotes for sale or purchase, and when another bidder puts forward a deal on these conditions, the market maker must complete it. Therefore, in the NASDAQ system, you can always see not only all offers for securities (and not just the "extreme" prices for buying and selling), but also the entire volume of the market, that is, all available offers for sale and purchase.
With low trading volumes and trading in low-liquid securities, the dealer market is the best solution for starting work in the stock market for beginners. Moreover, the bidder sees the name of the dealer who made a specific proposal. Transactions can be concluded both by phone and in the electronic system. Since NASD members can take part in trading, the broker exposes transactions of clients on his own behalf.
Rs
And our course for beginners in the stock market continues with a description of the Russian dealer market, an analog of NASDAQ. This is the PTC exchange (www.rts.ru). Initially, it was positioned as a trading system. Today, RTS is a dynamically developing stock market platform. Beginners need to know that trading is carried out in the main "section" of the RTS, which has been preserved since its inception, but there are other platforms.
In the guaranteed quotes section of RTS SGK, the most liquid securities of corporate issuers participate in trading.
In the FORTS derivatives market section, paper options and futures are traded, leading Russian issuers and stock indices participate.
There is also a joint project organized by the St. Petersburg Stock Exchange and the RTS, the purpose of which is trading in shares of RAO Gazprom.
"Old" section
Starting training on the stock market with this part of the RTS exchange is not a good idea. In the main, "old" section, bidders set quotes and conclude stock transactions with a choice of settlement currency and a way to fulfill these obligations. Securities are usually delivered to the buyer three days after the transaction, although in some cases the registration of the new owner of the securities may take two or more weeks. The main players in this segment are market makers and dealers, whose main customers are large Western funds and investors. The main trading currency is the US dollar. This site is inaccessible for online trading, it can be very inconvenient for beginners.
Books
The stock market for beginners is quite difficult to master, and it is quite difficult to set out the entire amount of information within the article, so we offer six excellent books that will help a beginner to understand the intricacies of trading on the stock exchange.
- V. Ilyin, V. Titov, "Exchange at your fingertips."
- John Murphy, "Technical Analysis of Financial Markets."
- A. Elder, "Trading with Dr. Elder. The Encyclopedia of the Stock Market Game." This book is practically a bible of trading, and is perfect as a course for beginners in the stock market.
- A. Gerchik, T. Lukashevich, "Stock Grail or The Adventures of a Pinocchio Trader".
- C. Face, The Way of the Turtles.
- D. Lundell, "The Art of War for Traders and Investors."