Martin Köpp

Maybe you are interested in doing a bit of personal investing on the stockmarket. First, you really need to comprehend how the stockmarket functions before you can tell when to invest and in which type of shares; so do not just jump straight into the market. Below I will go over the main functions of the stockmarket.

Maybe you are interested in doing a bit of personal investing on the stockmarket. First, you really need to comprehend how the stockmarket functions before you can tell when to invest and in which type of shares; so do not just jump straight into the market. In this article I will briefly explain what stockmarkets actually do.

The 2 Core Functions of the Stockmarket

As you will see, there are 2 core and totally different functions that the stockmarket performs. The first is called the primary market and the other is the secondary market.

The Primary Market

The primary market is when companies issue new shares and they are obtainable to the existing shareholders or to the public. The best way to understand the primary market - think of the resemblance to a new car dealer. The money you pay the dealer for your new car goes to the manufacturer less the dealer's mark-up. This is what happens in the primary market; the money from the selling of the new shares goes to the company less any additional expenses.

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

The Secondary Markets

The secondary markets are where investors can sell and buy shares and stocks. With the car comparison, we now consider a second hand car dealer. If you purchase a second hand car from the dealer, none of that money goes to the car manufacturer. In its place, the second hand car dealer has paid for a used car from the owner and has now sold it on to a new owner.

This way of bringing sellers and buyers together is how the secondary market of the stockmarket functions. The same that you are free to buy and sell a car, you are also free to buy and sell shares when you want. It is a way to turn assets into cash or the liquidity of the markets. In fact, without the secondary market there would be no primary market.

What Causes the Markets to Move?

Essentially, you could boil down the reasons that markets move to either the rational or the irrational factors. It is, of course, a lot more intricate than that. However, there are only three main motives that cause the markets to move and these are the irrational pack mindset of the investors (swings of optimism to pessimism with regards to risks), the fundamental factors (such as inflation, depression or government policies), and the technical factors (as an example - trends in investing or the attractiveness of an industry or product.)

It is necessary to know what moves the markets so that you can make better investing decisions both for long term and short term investing. You also have to take all of the factors into consideration as a whole and not just individual factors 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 merely keeping your money in a fixed interest security or savings account.