The Exchange and its background information
The word “exchange” comes from “gildi”, an old Scandinavian term for gathering or features. The stock exchange has evolved from the craftsmen’s guilds that commonly hold fairs. Today, any place where a trade meeting is held is called an exchange. However, investors are interested in one type of exchange, namely, the investment exchange. Below we present necessary information about the stock exchange, investments and shares.
What is an investment exchange?
In the UK, the London Stock Exchange is the only place where you can buy or sell shares and bonds. This does not mean that to invest in the stock market; you have to appear in person in the capital city to buy securities. Every stock exchange, whether domestic or foreign, is available through an intermediary (usually a brokerage house) offering online investments.
The stock exchange is, therefore, a unique platform on which virtual transactions can be conducted. The securities operate in the form of an entry in the account, and a physical copy may only be obtained upon special request. However, it is not needed for anything – the stock exchanges are entirely secure, and the use of electronic copies only speeds up transactions enormously.
And what is invested in the stock market?
An investor who already knows the basic information about the stock exchange should be aware of what it is worth investing in a given year. The stock exchange offers several opportunities, such as:
- company shares. This is the classic and most popular form of investment. Due to the high popularity and broad access to expert texts, even beginner investors can quickly find out what shares to invest in;
- ETFs (Exchange Traded Fund), i.e. an open-ended investment fund listed on the stock exchange, whose task is to reflect the behaviour of a given stock exchange index. ETFs are a good option for those who have already been in contact with investment funds. They are based on indicators and work on similar principles to actions;
- Exchange Traded Products (ETPs), i.e. financial instruments whose price depends on the value of a specific market indicator. This is a way of making simple investments in commodities or raw materials (as well as indices, goods, etc.).
- investment certificates, i.e. fund investment titles;
- Forward Rate Agreements.
The choice of the object of investment should depend on an individual feeling and understanding of the operation of a given object.
Now, how you invest in the stock market?
To invest in the stock market, you need to open an investment account with an agent. This can be done with a large number of banks and with a private broker. Please note that different brokers offer different terms and conditions for access to the stock exchange and also charge various commissions. Some provide training or educational materials. Choosing a good broker is half the success because a weak or expensive broker can ruin the real chance of a successful game on the stock market.
When it comes to the first investment, you should be guided by your own knowledge. The principle is simple – if you buy shares, let them belong to those companies you already know and which may be future-oriented. How do you find out which companies are performing best?
Data such as income, the percentage of the capital debt or periodic reports are mostly public. There are also several tools to compare companies whose shares are being listed on the stock exchange. In principle, companies with:
- little or no debt should be sought; the debt may not exceed 15-20% of the company’s capital;
- generating steady profits over the last five years;
- from sectors that experts consider to be developing at a given time (e.g. biotechnology, IT);
- from places with high economic potential (economies that are stable or undergoing rapid economic development, with stable domestic policies);
- having a specific development or production plan for the following calendar year.
This is the basis for information on how to invest in shares. Of course, an advanced investor may move away from the standard action in favour of risky moves (e.g. investments in companies from unstable parts of Africa, which can bring as much profit as a considerable loss). However, a beginner should rather bet on conservative strategies, because he does not yet have a sophisticated sense of the stock exchange itself, which can sometimes be very moody.
Which is what you need to know about the stock exchange.
The stock exchange can be quite capricious, so it is worth getting to know it well and insure yourself just in case. The best way to secure capital is to allocate it to several (three to five) holdings of different shares (other bonds, derivatives, etc.) This is called a portfolio diversification.
Diversification is a necessary safeguard against unexpected events. Unlike the stock exchange, where our investment object does not happen to lose almost all its value suddenly, companies sometimes tend to go out of business or go bankrupt. Bankruptcy, capital loss – and, as a result, the loss of value of all shares – have even happened to global tycoons, and you have to be aware of this.
The second issue that arises from the behaviour of the stock exchange is the phenomenon of the so-called correction when a company’s shares suddenly fall for no apparent reason at first sight. Beginner investors often mistake a deep correction for a reversal of the trend and then sell out their shares, but the truth is that a correction is the best time to buy. After the adjustment (no more than 15% of the share price), everything usually returns to normal.
Despite its apparent complexity, the stock exchange is considered a light and layman-friendly way of investing. There are a vast number of studies and educational materials on stock market investments, both domestic and foreign. However, this does not mean that investing in the stock market is fully secure and effective. Insensitivity and arrogance make 17% of unlucky people statistically lose more than 50% of their capital on the stock market. Thus it seems that the stock exchange, like any other way of investing, requires some caution.