Stock market: what is it and how does it work

What is the stock market? How does it work? Many people ask these legitimate questions about the stock market because we hear about it frequently.

Stocks, listed companies, and rising or falling indices are topics we often hear about, but of which we don’t know the actual meaning. The main problem in these cases is the confusion that occurs with the various terms.
So whether you want to invest in the stock market or not, to understand the market trend and the economic situation of a country you need to know some terms and concepts.

This article is therefore a guide for those who do not know the subject and want to delve into the world of trading a bit deeper.

Stock market: what is it?

The stock market is a marketplace (physical or virtual) where the greatest number of trading takes place with stocks.

However, different types of financial instruments are traded on stock exchanges, divided according to the type of contracts:

• the electronic stock market (subject of our article);
• the segment where covered warrants and certificates of deposit are traded;
• the electronic bond market where government bonds and other securities deriving from the securitization of credits are traded;
• TAH, the electronic market where it is possible to trade after the closing of the stock exchange, but only for stocks covered warrants and certificates;
• ETFplus, the electronic market where exchange-traded funds (ETFs) are placed;
• the market for derivative instruments (futures and options contracts on currencies, interest rates, and financial instruments). An exception is made for forwards which, despite being derivative contracts, are traded on OTC, over-the-counter markets, i.e. unregulated.

What is the stock market and how does it work?

After this brief overview of the stock exchange and how it operates, let’s now see how the stock market works.

The electronic stock market represents the segment of a stock exchange where stocks. are traded.
This is divided into:

• primary market, where newly issued securities are traded;
• secondary market, where securities that are already in circulation are traded.

The stock market is not a physical place where the buying and selling of securities takes place, but an electronic place, where shares are sold and bought, i.e. goods that are also non-material.

What is market capitalization?

The stock market is also divided into sections by capitalization threshold.
But what is stock market capitalization?
The size of a listed company is measured in capitalization, i.e. the value given by the number of shares in circulation for that company multiplied by their market price.

The sections of stock market capitalization are:

• Blue chip, where the shares of the 40 companies with the largest capitalization (over 1000 million euros) are traded;
• Mid Cap, where the securities of the 60 listed companies with high capitalization but which are not among the Blue chips are traded;
• Small Cap, where shares of companies that are neither Blue Chip nor Mid Cap are bought or sold;
• Micro Cap, for companies that do not fall within the minimum liquidity criteria necessary for the other segments;
• Star, for companies with capitalization between 40 and 1,000 million euros, but with high transparency, governance, and liquidity requirements;

What are stocks

Stocks are participation shares in the capital of companies incorporated as joint-stock companies. The two main types of actions are:

• Ordinary Shares, are those owned by the shareholders of a company. They grant the right to vote in company meetings and profits deriving from dividends and capital gains;
• Savings Shares, shares of this type are without voting rights, but guarantee patrimonial privileges such as dividends, i.e. the distribution of profits. They are mainly intended for small investors.

How much is a stock worth?

Each stock of each company is traded or bought or sold based on a price: the market value. This price continuously evolves based on the number and sign of contracts concluded.
For example, if you read that Apple shares are rising today, it means that many investors are buying Enel shares.

According to the classical laws of supply and demand in the economy, if demand rises, the price also rises. At the end of the day, when the session is officially concluded, you will have the official price of the Enel share in this case, the result of all the fluctuations that the value of the stock underwent during the session based on the number of trades.

What does the value of an action depend on?

What drives an investor to buy the shares of that particular company at that given moment? As we have already said, the formation of stock prices is a dynamic process like any other commodity market.

The value of a company share is influenced by:

• company performance (the health of the company, the capital size, future growth prospects, ownership structures, extraordinary finance operations such as acquisitions, mergers, and demergers): The increase in share price corresponds to better performance and investor interest. Whoever owns those shares will sell them, increase the offer, and lower the price in question;
• sector performance, i.e. the performance at the same time of other companies belonging to the same sector, including on other world stock exchanges;
• macro or foreign policy data directly or indirectly relevant for a company: positive news generates purchases and appreciation, negative news pushes sales and depreciation of the stock;
• news or rumors about the company, such as the discovery of new deposits for companies in the oil sector, the registration of a new patent for a company in the pharmaceutical sector, or news on possible mergers, joint ventures, or acquisitions.

How to invest in the stock market

If you want to invest part of your savings in the stock market, you can choose between:

• be an individual investor and act in full autonomy through online trading apps, generally offered as a service by all banks;
• rely on managed savings and subscribe to the shares of a mutual fund that will invest in shares for you.

Original article published on Money.it Italy 2016-12-14 09:20:00. Original title: Mercato azionario: cos’è e come funziona