How The Stock Markets Work
When trading in binary options, there are several assets from which you can choose. In addition to commodities like gold, silver and oil, you can trade in currencies, indices and stocks. Stocks are a very popular asset, not least when it comes to binary options. Rather than owning the asset, you can choose to trade on the movement of a company's stocks.
Stocks have grown exponentially since their introduction centuries ago with global stock exchanges worth millions and millions of dollars. Across the world, companies are making their shares public in a bid to raise capital. These stocks rise and fall as a company posts good profits, and bad results or big news stories impact the market.
For those that have a keen interest in stocks, many binary options brokers offer an extensive range. But what exactly are they, how did they come to be, what are the most popular shares and how exactly are they traded? We take a look in our guide to trading stocks.
In this guide, you will learn:
- An overview of the historic stock market
- About the most popular stocks available
- How investors and traders make money
What is a Stock
When referring to stocks, the term relates to ownership certificates of a company. When a company issues stock it is because they want to raise money to reinvest in the business. When you purchase stock, you are buying a share of that company and the company is increasing its capital in return for that share. Most people buy stock as an investment.
Usually, they anticipate that the stock will increase in value and that they will make money. Public companies use a stock exchange to sell their shares with anyone being able to buy these shares. Many things influence prices. If a company is doing well or posts good news such as increased profits or new product releases, it can affect the stock price.
Equally, this can apply in the opposite direction with stocks vulnerable to bad news or even global news events. The bigger the company, the more valuable the shares will be. While this makes the individual share prices expensive, it can also make for significant profits.
A company that comes from nowhere can suddenly grab everyone's attention pushing prices up and making that stock a hot prospect.
Brief History of Stocks
In 1602, the Dutch East India Company became the first company to publicly release shares on the Amsterdam Stock Exchange (now Euronext). In these early days of trading, much of it was carried out in coffee shops. Stocks were written on sheets of paper and exchanged. There was no regulation, and before long it got out of hand and very messy.
The UK banned the trading of shares until 1825 because companies were not paying a dividend to investors making the London Stock Exchange (LSE), launched in 1801, very limited. The New York Stock Exchange (NYSE) changed everything when it from its inception in 1817.
Since the day it began trading, it quickly became a force to be reckoned with, establishing itself as the most formidable stock exchange in the world. From this point on, stock exchanges were introduced by countries around the globe in even the most vulnerable and troubled countries.
The introduction of the National Association of Securities Dealers and Financial Industry Regulatory Authority (NASDAQ) saw electronic trading offering an edge and caused concern for the NYSE. The two have enjoyed a rivalry ever since.
As a rule, popular stocks tend to be the most valuable companies listed on a stock exchange. You can probably guess yourself which companies are among some of them. Big names like Facebook, Google, Apple are all considered premium stocks. Then there are the large banking institutes and other prominent global names.
These stocks aren’t cheap to buy, but for those big investors, if you invest enough, even a small rise in the price can make a significant amount of money. The trouble is with stocks; they aren’t static, and anything can happen. A company that comes from nowhere can suddenly grab everyone's attention pushing prices up and making that stock a hot prospect.
Those that lose a lot of money very quickly but are likely to rise again are also good prospects. The trouble is that it is so transient, it is hard to predict, so it is good to keep an eye on the markets, watch what other successful investors are doing and never take your eye off the ball. As you get more familiar with stocks, you will start to recognise trends, patterns and spot good opportunities when they arise.
How Stocks Are Traded
Trading in stocks is big business and has been for many years, long before you could trade binary options. Serious investors buy up shares and sell them strategically observing the prices for movement, global events and big news. Big news stories, political events and natural disasters can all have significant influences on the stock markets which is when people tend to buy or sell shares.
They also study companies carefully for indications of news or events that could swing the price in any direction. While stocks are bought and sold, they are also available via binary options trading.
Predicting whether the price will rise or fall in a designated period is much more accessible for those who perhaps don’t have the funds to buy up large numbers of shares, or enough investment to make the kind of profits you can with derivative trading.
By studying the trends, news and other resources available, you can predict whether you think a stock will rise or fall in price in any amount of time from 60 seconds to a matter of weeks. So, while traditionally shares are bought and sold, predicting the price movements is also a great way to trade.
Jacob has been an author for us since our launch in 2012. He has over forty years’ experience in the financial sector and has held a variety of positions within financial services corporations and venture capitalist organisations. Learn more.