Stock Market

The stock market (or equity market) is a complex financial system where issuers in need of capital meet investors looking to invest it for profit. It is one of the key elements of a modern market economy, ensuring the redistribution of monetary resources and determining the value of companies. Understanding its principles is essential for both professional financiers and individuals seeking to preserve and grow their savings. This article provides comprehensive information about the stock market, its instruments, functions, and trading strategies.

What is the stock market?

The stock market is an organized platform for buying and selling securities. It is often called the “barometer” of the economy because it is highly sensitive to political events, macroeconomic indicators, and corporate news. Historically, the first stock markets emerged as exchanges where trading took place in a physical space, but today most operations are conducted electronically through specialized trading terminals.

The main market participants are issuers (companies that issue shares to raise capital), investors (legal entities and individuals who buy securities for the long term), and traders (participants who profit from short-term price fluctuations). Brokers, who act as intermediaries between the market and clients, and regulators, who ensure compliance with the law, also play key roles.

The stock market is divided into primary and secondary markets. In the primary market, companies first list their shares through an IPO (Initial Public Offering), raising funds directly. In the secondary market, investors trade already-issued securities among themselves, and this is the most liquid and popular market. Without a secondary market, primary investors would not be able to easily sell their assets, making investments much less attractive.

Liquidity is the most important characteristic of a stock market, meaning the ability to quickly buy or sell an asset without a significant change in its price. Highly liquid markets, such as the NYSE or NASDAQ, provide stability and attract a huge number of participants. Thus, the stock market is not just a place for speculation, but a fundamental institution that finances the growth of business and the economy as a whole.

Main financial instruments of the stock market

A wide range of financial instruments trades on the stock market, each with its own unique characteristics and risk level. The most well-known and common instrument is stocks. A stock is an equity security that gives its owner the right to a portion of the company’s profits (dividends) and a share of its assets in the event of its liquidation. Owning stock makes an investor a part-owner of the business.

Another important instrument is bonds. These are debt securities where the issuer (a government or company) obligates itself to pay the investor the face value on a specific date and regular interest payments (coupons). Bonds are considered a more conservative and predictable instrument compared to stocks, as they are less susceptible to market volatility.

Mutual funds and their exchange-traded equivalents, ETFs (Exchange-Traded Funds), allow investors to diversify their investments. Instead of buying shares of a single company, an investor buys a share of a fund, which in turn invests in an entire portfolio of stocks, bonds, or other assets. This is an ideal instrument for beginners who lack sufficient experience to form their own portfolio.

Derivative financial instruments, or derivatives, such as futures and options, also trade on the stock market, although they are more commonly associated with the futures market. These contracts are based on the value of an underlying asset (e.g., stocks) and are used for hedging risks or for speculative leveraged operations. Their use requires high qualifications due to their complexity and increased risk.

Stock market functions and characteristics

The stock market performs several key functions in the economy. The first and main one is the redistributive function. It involves mobilizing free funds from individuals and institutional investors and directing them to the most promising and efficient sectors of the economy. Thus, capital flows from those who have an excess of it to those who need it for development.

The second most important function is price discovery. Through free trading based on supply and demand, a fair market price is established for the securities of thousands of companies. This price reflects the collective opinion of millions of investors about the current and future financial condition of the issuer, its prospects, and risks.

The third function is control. Public companies whose shares trade on an exchange are under close scrutiny from regulators and investors. They are required to regularly disclose financial statements and material information, ensuring transparency in their activities and protecting shareholders’ rights. A low stock price can signal management inefficiency.

The fourth function is incentive. The ability to raise large capital through an IPO motivates entrepreneurs to develop their companies, introduce innovations, and improve operational efficiency. For investors, the market creates an incentive in the form of potential income, encouraging them to save and invest rather than spend their funds.

What characterizes the stock market?

The stock market is characterized by several fundamental concepts, the understanding of which is critical for successful trading. Volatility is a statistical measure that reflects the degree of price variability of an asset. High volatility means large price swings in short periods of time, which creates opportunities for profit but also increases risks.

Liquidity, as already mentioned, determines how quickly and at what cost a transaction can be executed. Highly liquid “blue-chip” stocks (from the largest and most reliable companies) have a narrow spread (the difference between the bid and ask price) and high trading volume, allowing trades to be executed at any time without significant price slippage.

Another key characteristic is the trend. Stock market prices rarely move chaotically; they form upward (bullish), downward (bearish), or sideways (flat) trends. Identifying a trend at an early stage is one of the main tasks of technical analysis. “The trend is your friend” is one of the main trader proverbs.

Return is a quantitative characteristic showing what percentage of profit an investment has generated over a certain period. It can consist of the increase in the asset’s market price (capital gain) and dividend payments. Investors always weigh potential return against associated risks.

How to make money on the stock market?

There are two main ways to make money in the stock market. The first is investing. An investor buys shares of promising companies for the long term (years or even decades), counting on their fundamental growth and receiving dividends. This approach requires thorough analysis of the business and patience but has historically proven its effectiveness (Warren Buffett’s strategy).

The second way is trading, or speculation. Traders profit from short-term price fluctuations, buying low and selling high. They can hold positions from a few seconds (scalping) to several weeks (swing trading). This approach requires deep knowledge of technical analysis, discipline, and constant market monitoring.

A third, less obvious way is generating passive income through dividends. Many stable companies regularly pay out a portion of their profits to shareholders. An investor who builds a portfolio of such “dividend aristocrats” can receive a stable cash flow without selling the shares themselves. Reinvesting dividends significantly increases the final return through compound interest.

A fourth way is investing in bonds to preserve capital and generate predictable income. Although the potential return of bonds is lower than that of stocks, they provide greater stability and are used to protect a portfolio during market turmoil. A combination of stocks and bonds allows for a balanced portfolio.

Fear index in the stock market

The “Fear Index” is the unofficial name for the VIX (Volatility Index), which is calculated by the Chicago Board Options Exchange (CBOE). It reflects market participants’ expectations of volatility in the U.S. stock market (the S&P 500 index) over the next 30 days. Essentially, the VIX measures the level of fear and greed among investors.

When the market is calm and optimistic, and indices are rising steadily, the VIX value is at low levels (usually below 20). During such periods, investors are confident about the future and see no reason to panic. A low VIX signals a period of “greed” where participants are actively buying risky assets.

During times of uncertainty, crises, or sharp market crashes, the VIX value soars. This happens because investors start actively buying protective options, hedging their portfolios against further declines. A sharp spike in the VIX above 30-40 points is a classic sign of panic sentiment.

Traders and investors use the VIX as an indicator for decision-making. Extremely high VIX readings are often interpreted as a signal of an “oversold” market and a potential entry point for long positions. Conversely, abnormally low values may precede a correction. The VIX itself is also a tradable asset through futures and ETFs.

Stock market trading strategies

Stock market trading strategies can be broadly divided into two groups: those based on fundamental analysis and those based on technical analysis. Fundamental analysis involves a deep study of a company’s financial metrics: revenue, profit, debt, profitability, etc. The goal is to find stocks that are undervalued by the market with high growth potential.

Technical analysis, in contrast, completely ignores fundamental metrics. It focuses on price and volume charts, believing that all information is already embedded in the price. Technical analysts (chartists) use patterns, indicators (e.g., moving averages, RSI, MACD), and support/resistance levels to forecast future price movements.

The “Buy and Hold” strategy is a classic of long-term investing. An investor buys shares of quality companies and holds them for many years, ignoring short-term market fluctuations. The success of this strategy is based on faith in long-term economic growth and the ability of businesses to increase their value over time.

The dividend strategy aims to select companies with a stable and growing history of dividend payments. An investor builds a portfolio of such issuers to receive regular passive income. Key metrics for selection are dividend yield and the payout ratio, which shows what portion of earnings is paid out as dividends.

Value investing strategy, popularized by Benjamin Graham and Warren Buffett, involves finding “stocks at a discount.” An investor looks for companies whose intrinsic value (calculated based on assets and earnings) is significantly higher than their current market capitalization, and buys them expecting subsequent growth.

What markets are considered stock markets?

Stock markets primarily include centralized exchange platforms where the main volume of securities trading occurs. The largest in the world are the New York Stock Exchange (NYSE), NASDAQ (USA), Tokyo Stock Exchange (Japan Exchange Group), and Shanghai Stock Exchange (SSE). It is on these platforms that shares of global corporations are listed.

In each country, there is typically one or several leading stock exchanges. In the US, these are the NYSE and NASDAQ. Shares of companies such as Apple, Microsoft, Amazon, and Tesla form the backbone of the US stock market.

Stock markets also include over-the-counter (OTC) platforms, where securities that are not listed on major exchanges trade (e.g., shares of small or startup companies). Trading on OTC markets carries higher risks due to lower liquidity and less stringent disclosure requirements.

In terms of instruments, stock markets include all platforms where equity (stocks) and debt (bonds) securities are traded. Thus, the bond market, including government (Treasuries) and corporate bonds, is an integral part of the overall stock market.

How is the stock market different from the financial market?

The stock market is a component of the broader concept of the financial market. The financial market is an umbrella term for the entire set of markets where financial assets are traded. Besides the stock market, the structure of the financial market includes the foreign exchange market (Forex), the derivatives market, the money market, and the commodity market.

The key difference lies in the underlying assets. The stock market trades specific securities: stocks and bonds. The foreign exchange market (Forex) trades currency pairs (e.g., EUR/USD). The derivatives market trades derivative instruments (futures, options), and the commodity market trades raw materials (oil, gold, wheat).

The goals of the participants also differ. The stock market is more focused on long-term investments and direct financing of companies. The forex and derivatives markets are primarily used for speculation, hedging risks, and arbitrage operations, where trade durations can be extremely short.

The markets also differ in their operating hours and regulation. Stock exchanges have clear trading sessions (e.g., 9:30 AM to 4:00 PM ET for US markets). The Forex market operates 24 hours a day, 5 days a week. Each segment of the financial market is overseen by its own regulators, who set specific rules.

What are stock market indices used for?

Stock market indices are composite indicators that reflect the dynamics of a large group of stocks united by a specific characteristic. The main task of an index is to provide a general overview of the condition and direction of the entire market or a specific segment of it. For example, a rising S&P 500 index speaks to the “health” of the US economy.

Indices serve as a benchmark for investors and managers. By comparing the return of their portfolio with the return of a benchmark index, an investor can assess the effectiveness of their strategy. If a portfolio consistently underperforms the index, it may be worth revising the approach or switching to passive investing through ETFs.

Indices form the basis for creating derivative financial instruments and index funds. There are futures and options on indices like the S&P 500, RTSI, and others, which allow making bets on the movement of the entire market. ETFs that replicate the structure of an index allow millions of investors to buy “the whole market” with a single trade.

Analysts use indices to study industry trends. There are sectoral indices that include stocks of companies from one sector (e.g., IT, pharmaceuticals, finance). By observing their dynamics, conclusions can be drawn about which industries are on the rise and which are stagnating.

How to buy gold on the stock market?

Buying gold on the stock market is a modern and convenient way to invest in the precious metal without the need for physical storage. The primary instrument for this is Exchange-Traded Funds (ETFs). The most famous of these is SPDR Gold Shares (GLD), whose shares trade on the NYSE. Each GLD share is backed by physical gold stored in vaults.

To buy shares of a gold ETF, a US investor needs to open a brokerage account with a reliable broker that provides access to the markets. Next, you need to fund the account, find the fund’s ticker (e.g., GLD), and execute a buy order. This process is no different from buying shares of Apple or Google.

An alternative method is buying futures contracts for gold on the derivatives market. However, this method is suitable for experienced traders due to the use of leverage and the complexity of the futures settlement mechanism. For a long-term investor, an ETF is a simpler and safer option.

Another option is investing in shares of gold mining companies (e.g., Newmont Corporation, Barrick Gold). In this case, profitability depends not only on the price of gold but also on the efficiency of the company itself, which adds an extra risk. However, during periods of rising gold prices, such stocks often outperform the metal itself in terms of returns.

Brief dictionary of a stock market and equity trader

Stock – A security granting ownership in a company and a share of its profits.
Blue Chips – Shares of the largest, most reliable, and liquid companies.
Bull Market – A period of rising prices and investor optimism.
Bear Market – A prolonged period of falling prices.
Diversification – A strategy of allocating capital among different assets to reduce risk.

Dividends – A portion of a company’s profit distributed to shareholders.
Quote – The current price of a stock.
Liquidity – The ability of an asset to be quickly sold at the market price.
Portfolio – The totality of all securities owned by an investor.
Trader – A market participant who earns through short-term speculation.

Investor – A participant who invests money for the long term.
Volatility – The degree of price fluctuation of an asset.
Issuer – An organization that issues securities.
IPO (Initial Public Offering) – The first public sale of a company’s stock on an exchange.
Broker – A licensed professional who executes a client’s trade orders.

How to become a millionaire in the stock market

Becoming a millionaire in the stock market is an achievable but difficult goal that requires discipline, knowledge, and time. The most reliable path is regular long-term investing, not trying to get rich quickly through speculation. The “buy and hold” strategy with dividend reinvestment and additional contributions has historically shown outstanding results.

The cornerstone is compound interest. Small but regular investments in a broad market index (e.g., via an S&P 500 ETF) over decades can turn into a huge fortune. The key is to start as early as possible and let time and compounding work for you, without withdrawing money at the first correction.

Diversification and risk management are mandatory conditions. You cannot invest all your funds in the shares of a single company, no matter how attractive it may seem. Losing all capital due to the bankruptcy of one issuer will undo years of effort. Successful investors never risk an amount they cannot afford to lose.

It is important to continuously learn and maintain emotional stability. Markets are cyclical: booms are followed by busts. Millionaires are those who buy undervalued assets during the panic of others and remain cool-headed during periods of euphoria. Following a clear investment plan and ignoring the “noise” is the key to success.

Global sectoral stock markets

Global stock markets can be classified not only by country but also by industry, allowing investors to make targeted bets on the development of specific economic sectors. The Technology sector (NASDAQ) is one of the most dynamic. It includes companies involved in software development, semiconductor manufacturing, and internet services (Apple, Microsoft, NVIDIA).

The Financial sector includes banks, insurance companies, and investment funds (JPMorgan Chase, Bank of America). Its health is closely tied to the macroeconomic situation: during periods of growing lending and low interest rates, stocks in this sector perform well. It is the “circulatory system” of the economy.

The Healthcare and Pharmaceuticals sector (Johnson & Johnson, Pfizer) is considered defensive. Demand for medicines and medical services is weakly dependent on economic cycles, making the stocks of these companies stable even during a crisis. Innovations in biotechnology also make this a growth sector.

The Energy sector is divided into traditional (oil & gas companies like Exxon Mobil, Chevron) and alternative (renewable energy). Its dynamics heavily depend on commodity prices and the geopolitical situation. In recent years, “green” energy has been gaining momentum, attracting future-oriented investors.

How to get into the stock market

To start investing in the US stock market, an individual needs to take a few simple steps. The first step is choosing a licensed broker.
The largest brokers in the US are:

• Charles Schwab (including its popular platform TD Ameritrade)
• Fidelity Investments
• Vanguard
• E*TRADE (a subsidiary of Morgan Stanley)
• Interactive Brokers

It is important to compare commission fees, quality of service, and the convenience of the trading application.

The second step is opening a brokerage account. This can be done online from home through the website or mobile app of the chosen broker. The process takes from a few minutes to one day and requires providing identification details. Types of accounts vary: Individual Retirement Accounts (IRA, with tax benefits) or a standard brokerage account.

The third step is funding the account. After opening the account, it must be funded using any convenient method: bank transfer, from a card, etc. The minimum amount to start investing can be as low as the price of a single share of an ETF, making the market accessible to a wide range of people.

The fourth step is selecting and purchasing securities. Through a trading terminal or the broker’s mobile app, you need to find the desired security by its ticker (e.g., “AAPL” for Apple) and place an order to buy at the market price or at a limit price you set. After the order is executed, the shares will appear in your portfolio.

Difference between the stock market and the derivatives market

The stock market and the derivatives market are two different segments of a trading platform (e.g., the NYSE or NASDAQ) with fundamentally different assets and purposes. The stock market trades underlying assets: stocks, bonds, fund shares. Buying a stock makes you the owner of a share in a business. Trades are executed using your own funds.

The derivatives market (from the word “term”) trades derivative financial instruments – derivatives. The main ones are futures and options. These are contracts for the future purchase or sale of an underlying asset (e.g., a share of Apple or a barrel of oil) at a price agreed upon today. The asset itself is not transferred.

A key difference is the use of leverage. In the derivatives market, only a margin (good-faith deposit) is required to open a position, which is only a fraction of the contract’s value. This allows for increased potential returns but multiplies the risks. Leveraged (margin) trading also exists in the stock market but is less common among beginners.

Derivatives contracts have a limited term. Each futures or option has an expiration date, after which it ceases to exist. In the stock market, purchased shares can be held in an account indefinitely. Therefore, the derivatives market is used mainly for speculation and hedging, while the stock market is used for investing.

Best books about the stock market

For a deep dive into the topic of the stock market, it is necessary to study literature written by recognized masters. Benjamin Graham’s book “The Intelligent Investor” is rightly considered the bible of value investing. It lays the foundation for understanding the difference between investment and speculation and teaches how to look for undervalued companies.

The work of Peter Lynch “One Up On Wall Street” is unique because it was written by one of the most successful fund managers in history. Lynch popularized the idea that an ordinary investor can find “tenbaggers” (stocks that grow tenfold) in their everyday life by simply observing trends.

The book by William J. O’Neil “How to Make Money in Stocks” represents the opposite, growth-oriented approach. It introduces the famous CAN SLIM system, which combines elements of fundamental and technical analysis to find fast-growing companies in the early stages of their upward trend.

“Trading Chaos” by Bill Williams is a must-read for those interested in trading psychology and a non-linear approach to market analysis. The author suggests looking at the market as a chaotic system and provides tools for working in such conditions. The book changes one’s perception of market processes.

Stock market scams

“Scams” in the stock market refer to fraudulent schemes aimed at illegally obtaining money from gullible investors. The most common type is offers from unlicensed “bucket shops” and pseudo-brokers. They promise super returns, guaranteed results, and exert psychological pressure.

Such companies often do not route client trades to the real market but act as the counterparty themselves within their platform. They can artificially create slippage, manipulate quotes, and impose predatory terms that make withdrawing funds almost impossible. Checking the broker’s license with the SEC (Securities and Exchange Commission) is a mandatory procedure.

Another type of fraud is “investment” pyramids disguised as asset management companies or PAMM platforms. They attract clients with high interest rates (e.g., 5-10% per month), paying old depositors with money from new ones, and disappear when the flow of funds stops. Remember: high returns are always associated with high risk, and there are no guarantees in the market.

The scheme with “free signals” and managed accounts from “gurus” on social media is also widespread. Typically, behind beautiful graphics and bot reviews lies incompetence or direct deception. No one who truly knows how to consistently earn money in the market will sell their secrets for $10 a month. Education and independent trading are the only reliable path.

Conclusion

The stock market is a powerful and democratic tool for capital appreciation, accessible today to almost everyone. It provides unique opportunities to participate in the growth of the global economy and the largest companies. However, success in this field requires a serious approach, continuous learning, and iron discipline.

The path of an investor is a marathon, not a sprint. The key to long-term success lies in fundamental analysis, diversification, risk management, and, not least, emotional control. The “buy and hold” strategy, dividend reinvestment, and the use of index funds (ETFs) have proven effective for most individual investors.

It is important to remember the risks and avoid fraudulent schemes promising easy profits. A reliable licensed broker, transparent conditions, and an understanding of the essence of the acquired assets are the foundation of safety. The stock market is not a casino for those who approach it as a business.

Ultimately, the stock market is not just about money. It’s about developing financial literacy, understanding global economic processes, and making informed decisions. By starting to invest today, you are making a contribution not only to your financial future but also to the future of the real economy, financing innovation and development.