What does the Stockmarket Actually Do?

By William Wilkie_ | December 29, 2009 | Popularity: unranked (?)

Maybe you are interested in doing a bit of personal investing on the stockmarket. This could be a good strategy but don’t start yet; your first task should be to learn all you can about the functions of the stockmarket so that you can make informed decisions about which shares to invest in. Below I will go over the main functions of the stockmarket.

The 2 Core Roles of the Stockmarket

There are in fact two main and completely different functions that the stockmarket fulfills. One is the primary market and the second is called the secondary market.

Primary Market

In the primary market, companies can issue new stocks that are offered to the existing shareholders or to the public. The best way to comprehend the primary market – think of the resemblance to a new car dealership. You pay money to the dealer for your new car and this money goes to the manufacturer minus the dealer’s mark-up. A similar scenario goes on in the primary market; the money raised by the new stocks goes to the company minus any costs.

Companies usually offer new shares for expansion; like building a new factory, to develop a new product line, or to refinance debt. This can be explained as the raising of capital by sharing the risk in exchange for potential higher profits.

The Secondary Markets

The secondary markets are where investors can buy and sell stocks and shares. With the car comparison, we now think about a second hand car dealer. When you purchase a second hand car from the dealership, the money does not go to the car manufacturer. In its place, the second hand car dealer has bought a used car from the owner and has now sold it on to a new owner.

The secondary market therefore works by bringing together the buyers and the sellers. Just as you can buy and sell a car, you can also buy and sell shares at will. This is the liquidity of the markets or the way to turn assets into cash. Remember that without the secondary market there would be no primary market.

What Causes the Markets to Move?

Basically, you could boil down the reasons that markets move to either the rational or the irrational factors. But of course it is a lot more complicated than that. However, there are only 3 main motives that cause the markets to move and these are the irrational herd mindset of the investors (swings of optimism to pessimism with regards to risks), the fundamental factors (for example inflation, depression or government policies), and the technical factors (for example investment trends or the attractiveness of a product or industry.)

It is necessary to know what moves the markets so that you can make better investing decisions both for short term and long term investing. You also have to take all of the factors into consideration all together and not just one factor if you want to minimize your risks. By learning and gaining knowledge about how the stockmarket works, before starting to trade, you will be able to make a healthier return on investment than if you just kept your money in a savings account.

William Wilkie is a writer of personal finance services and products. Check out his website for the top Identity Theft Program and read the TrustedID Review.

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