Basic knowledge of how the stock market works can give you a significant trading edge. So here is a brief guide for traders starting out in the stock market.
Before we explore how the stock markets work, let's talk about how it came into being.
The merchants of Venice are credited with trading state securities as early as the 14th century, but the first real stock markets didn't appear until the 1500's.
As is generally the case, a need lead to the creation of the stock market. The East India Company, which has the distinction of being the first publicly traded company, allowed investors to invest in several ships. So instead of financing a single ship and risking a total loss to pirates, disease and storms, it allowed investors to buy shares in multiple ships, so that if one ship was lost, not everything would be lost. Their success has led to similar schemes being set up for other companies in Belgium, England and the Netherlands. Coffeeshops were their trading floor, where stocks were handwritten on sheets of paper and traded.
Antwerp was the commercial center of Belgium, and it is generally believed that it hosted the world's first stock exchange system.
The creation of the Paris stock market occured in 1725 at the Hôtel de Nevers in order to restore the French economy which had been disrupted following the bankruptcy of the Law system which recommended the use of paper money (notes ) rather than metal currency (metal coins).
The equity market is a common term for the issuance of securities or their trade (buying and selling). These include stocks, bonds and other assets. There are two types of markets:
The stock exchange is an organised market for publicly available securities. It matches investors who want to buy (requests) and investors who want to sell (offers). The stock exchanges keep a register of the value of the securities, including their evolution over time.
To buy and sell stocks on the stock exchange, you must place an order through a stockbroker - this is a company that is authorised to provide you with access to the stock exchange.
There are generally three standard prices that are quoted on the stock market:
When placing an order to buy or sell stocks, you have two pricing options to choose from:
Note: When looking for the relevant price for your order, you should look at the other side of the trade. This means that if you want to sell, you have to look at how much buyers are willing to buy at in order to determine at what price you could sell them, and vice versa if you want to buy.
The stock market operates on a "first come, first serve" basis and uses a queue system for traders that place limit orders.
Note: if several traders place an order at the same limit price, they will be queued in the order they were placed on the market. For example, if you want to sell a particular stock at £200 and three other people already have sell orders in the market at £200, they are at the top of the queue and their orders will be executed before yours.
It can be helpful to look at market depth when placing orders to see the other orders that are also in the market. Market depth allows you to see where your order might be traded or placed in a queue, depending on the price and quantity you set.
Market depth shows:
For example:
If you want to buy 100 shares and don't want to pay more than a limit price of £11.124, your order will be placed in the queue behind the single buyer who has a limit price of £11.124. The first buyer of 400 shares and then you (100 shares) would then be placed in the queue until one or more sellers are ready to accept £11.124 to sell their shares. You will then have to wait for the buyer's order of 400 shares in front of you to be executed before you can also buy shares at that price.
If you wanted to buy 100 shares at the market price, you would pay £11.126 for all 100 shares and your order would be filled immediately.
If you wanted to buy 750 shares at the market price, you would pay £11.126 for 710 shares (i.e. all the shares of the two best sellers) and £11,128 for the remaining 40 shares, as you will have to buy them from the next sellers in the queue. Your order would be filled immediately.
You can buy stocks directly from your stock brokerage account. The following platforms allow you to both buy and sell stock online using your computer and/or smartphone.
Brokers | |
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Account type | Stock trading account, margin account (79% of CFD accounts lose money) |
Management by mandate | No |
Stock brokerage fees | No commissions for a min. monthly volume of €100,000 EUR, otherwise 0,20%. |
Demo account | Yes |
Our opinion | Trading without commissions, but with a very limited choice of 2,000 shares and 16 ETFs. |
Broker review | XTB |
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Investing carries risks of loss |