Stock Exchanges And Wealth

Demystifying the Stock Exchange: A Beginner’s Guide

The stock exchange has existed for 200 years now, and yet it’s still a mystery to some people who think that wealth is concentrated among the rich and moneyed who manipulate the bourse for their own benefit.

Understanding Stock Exchanges

Perhaps it’s best to demystify stock exchanges by comparing it to your local market, and the tenants represent the traders and brokers. When you go to the market, you intend to purchase something or trade your money for goods or services.

Creating Wealth Through Investment

It’s the same with the stock exchanges. Wealth is created by the brokers and investors when the company they buy shares in also increases in value. When you purchase stocks, you are actually buying a share in the company. It’s not just some random numbers picked out of a lighted neon board while greedy oligarchs pull the strings from behind the curtain like the Wizard of Oz.

Tangible Returns on Investment

Your investment in a particular company is tangible. When you buy a share for $5 from Company A, for instance, and the value of the shares rises to $20, then you get a handsome profit when you unload and sell the shares. That’s how wealth is created in stock exchanges.

The Role of the Secondary Market

Much of the trading in stock exchanges today revolves around the secondary market. So when you purchase a share from a company, you are actually buying from the person who owned the primary stock, not the company itself. You also don’t have a say in management even if you own a good chunk of the shares.

Ensuring Market Liquidity

But trading in stock exchanges is necessary so that the market remains liquid, and companies are able to move their shares. There’s nothing scarier in the eyes of brokers and investors than seeing the market stagnate. Like a freight train, stock exchanges need to keep chugging along in order to create wealth.

Benefits for Investors

However, if you don’t own the primary stocks (except, of course in some initial public offerings), what’s in it for you? You get dividends—although these are not commonly given out anymore—or the value of your stocks rises, which means you can rake in profits if you decide to sell at the right time.

Making Informed Investment Decisions

Stock exchanges can create wealth for you, but you need to be smart about your moves. For instance, some people actually still buy stocks from a company despite struggling and hitting the 52-week benchmark. That’s just bad strategy. To paraphrase Albert Einstein, insanity is doing the same thing over and over again and expecting different results every time.