Category: Glossary


wrong stock market definition

There is a ton of buzz, romance, fantasy, excitement, and insanity around the concept of investing, trading, or gambling with the stock market.  The average person loves to think about returns, compounded growth, how fast a stock can double, and all those other sexy concepts.  Very few people really thinking about what the stock market definition is.  So before you read any further you probably want to know why you even care about understanding stock market definitions.

If you were like me, you probably thought of the stock market as a wizard behind the curtain.  Some magical or all powerful person or machine randomly moved the stock price up or down and people reacted.   If too many people bought or sold the computer would adjust.  Your job as an investor or trader was to react to the changing price accordingly.  In this mindset your stock market definition would be along the lines of:

The stock market is the mover a stock values which you buy to and sell to

In reality a stock market is a platform that controls the exchange of shares between different people.  The market is simply a medium between people.  These platforms often have rules and regulations that control how people can buy stock, how people can sell stock, and what companies can be exchanged on this stock market.  A key thing to understand is a stock market doesn’t actually buy or sell shares of stock people do.  Understanding this fact will help you be a better trader or investor because people change the whole game.  If you were competing against a computer you’d only have to learn the formulas, learn the rules, create your game plan and follow it until it quits working when you would evaluate to see if the rules had changed.  However, people have these funny things called emotions.  Emotions don’t follow the same rules as business, logic, or common sense.  In the end those things will generally play out because it’s about making money, but in the short term (which can be longer than you think) the stock market emotion of the buyers or sellers can override good thinking.  If you remember that for any share to be transferred there has to be a buyer and a seller you’ll understand the system better.

correct stock market definition

One Buyer one Seller

When a stock price is moving up it’s because there hasn’t been any issues finding new buyers.  As long as a trade happens quickly at a given price the price will move up, if there are still no issues finding buyers it will move up more.  If this isn’t the case then the price will start moving down until there issues finding sellers.  The stock market requires a balance.  Using this thinking I would state a better stock market definition as such:

The stock market is a entity that controls the balance of buyers and sellers through price control, regulations on buying stock, regulations on selling stock, regulation on stock accepted within the market.

So if price control controls the balance between buyers and sellers why does a stock market need to regulate buyers, sellers, and the shares themselves?

Stock Market Regulation of Buyers/Sellers

If a stock market doesn’t control who can buy and sell what stock and under what conditions you get the problem of manipulation.  If people who have information or influence on the information of a company more than the general public are free to trade within the system eventually no one will trade within the stock market because they will always lose.  If no is willing to trust the system you have no stock market at all and you lose one of the great advantages of the stock market which is liquidity.  Liquidity is the ability to convert your assets to cash or your cash to assets.  If you own a small business you may understand this already.  Your business might be worth $300,000 but only if you can find someone to buy it.  However, if you own $300,000 in stock of a company this is traded on a stock market, you can sell some or all of these shares, do what you need to do with the cash, and repurchase the stock the same day.  This is why maintaining the trust of the stock buyers and stock sellers is so critical.

Regulating the Companies’ Stock

How a stock market chooses to regulate a company stock is through validation of financial records, minimum earnings, minimum revenue, and minimum number of shares.  These are the big hitter issues.  If a company isn’t trustworthy and it’s legal documents are false it will not only crush the company when the news is brought to light, but give a black eye to the stock market as a whole.  If a company is too small it may be too easily manipulated by larger investors.  If there are not enough shares then a stock market may have a difficult time properly pricing the company through the required constant trading creating wild price swings or market manipulation.

In summary the stock market definition is an entity that publishes the going price for there to be both a buyer and a seller of a share of stock in a given company, prevents manipulation or fraud of the value of a company, and profits from the exchange in these shares by creating value to the customer by providing liquidity in what would normally be a hard to exchange asset.

The Chinese Stock Market

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There are really two Chinese stock market choices.  The first is the Shanghai Stock Exchange and the other is the Shenzhen Stock Exchange.

The Shanghai Stock Exchange (SSE) is the  5th largest stock exchange, however, it is also one of the most restricted.  The structure is in A and B shares.  The majority of stocks are listed in  A shares that trade in the Chinese currency renminbi yuan and can only be traded by Chinese traders.  The B shares (with much fewer choices for the investor) can be traded by anyone.

The listing requirements for the SSE is similar to other large exchanges.  They have a market cap minimum ($30 mil), profitability over the last 3 years, and at least 25% of their company is traded on the open market.

The other Chinese stock market is the Shenzhen stock market.  This is like the NASDAQ equivalent in China.  The exchange is completely electronically managed called the ChiNext.  This companies on this exchange are mainly high-tech start ups that are majority owned by the Chinese government.

My personal opinion is with the increased globalized economy many of the large corporations will begin to be traded on Chinese stock markets which will decrease spreads on these companies and increase trading activity.  This will also lend creditability to many of the Chinese companies that still aren’t trusted by the average investor.

 

If you are new to the stock market, you should definitely pursue information regarding stock market and stock trading for dummies. Information regarding stock market for dummies is readily available online in the form of articles. These articles will give you the basic information regarding the stock market and stocks trading. Actually, you don’t need to know all the technicalities involve in stocks trading, however, it is good that you know the basics on how the system works in order to be successful.

So what is the stock market? The stock market is a system that allows companies to raise more capital funds by selling a part of the company to the general public. This company ownership is called stocks or shares. The funds gained from selling company’s share may be utilized to expand the company of enhance a product. The more shares you have in a company, the greater your influence on the decision making process of it. By giving up a part of the company’s ownership, the original owner gains substantial amount of money for the operational costs and at the same time retains the power over the said company.

The prices of thee stocks may go up in down depending on various actors. Some of the factors that may affect price of stocks include the economy, political issues, unemployment rate and other relevant factors. Because of these different factors that affect the stock market, investing money in the stock market involves great risks. An investor may choose to hold on to their stocks when the price goes down or sell it. Strategies are important for you to be successful in stocks trading.

Because of the vast information revolving around the stock market, there are still a lot of things that a beginner should know about the system. Such stock market 101 information should include strategies, speculating trends, biddings, and learning important terminologies such as spreads, bid, ask and others. If you think that you need more information regarding the stock market continue looking for information regarding stock market for dummies and stock trading for dummies. This information will be significantly helpful in your quest to become successful in stocks trading.

Value Investing Tips

Warren Buffett is the king of investing and he is the one who has made value investing famous.  He has a knack for finding diamonds in the ruff companies who have inherent value that are undervalued by the market.  He is the one who has brought sensibility to the markets time and again.  And he has saved many investors from falling into the trap of wanting to make short term gains in exchange for long term investing.

Here are a couple of investing tips from the Oracle of Omaha.  These are simple pieces of advice taken from the greatest value investor of our time.  These may sound really simple, but remember it has brought at least one man exponential returns over time.  It will sound like stock market 101 but so many investors disregard these principles.

First of all, understand the business you are investing in.  Too many investors buy stocks purely on it’s share price, or some other market valuation.  The market isn’t always right.  Very rarely will an investor actually go in and do research on a company before he invests.  This is vitally important for any trader or investor.

Take Buffett for example.  He reads tons of annual reports every year and that is how he finds his deals.  In fact, he often tells of when he first got starting in this business how he read through Standard & Poor’s directory of companies several times to find good companies to invest in.

Secondly, do your own business valuation.  Buffett does his own and only then does he go and look at what the market cap is.  If the market value is below what he thinks the business is worth, he goes in for the kill.  Otherwise, he stays out.

It doesn’t make much sense to invest in a company that you haven’t valued.  That is going in blind, usually following a trend or a fad.  This might be a good stock investment strategy for a day trader, but for a long term investor, you should know what a company is worth or at least have some idea.

Again, very simple advice, but so often ignored.  It is difficult to valuate a company, but you should learn how to do it and then do it.  It’s not an exact science but you can learn to do it.