The stock market assembles buyers and sellers, allowing them to trade securities, which are in the form of investment products like bonds, shares, and investment trusts. The stock market for investors is tantamount to an auction, where bids are placed and the sellers offer the selling prices for shares of stock. When a bargain is struck, a trade occurs.
Bid-ask spread is a term used to describe the difference between what buyers are willing to pay and what sellers are willing to accept. A smaller bid-ask spread shows an easily traded and more liquid security.
The value considered by the cumulative market of buyers and sellers to be the price of stocks represents its price. Its value is primarily determined by demand and supply, just like it is with everything in the economy. The availability of a higher number of sellers trying to sell their stock than the number of buyers available leads to a fall in price. A sudden and significant drop in most stocks leads to a crash in the stock market.
The stock market may generate an average of 9% to 10%, but investors are aware of the risks that are involved as there could be a decline of up to 30% or more in a single year
How Does Investing in Stocks Work?
Stock is used to representing ownership of a share in a publicly-traded company. If you own a share in a company, you have an ownership stake in that company. This gives you the right to the corporate policy of the company and a claim to a percentage of its revenues
Investors typically invest in the stock of a company with the hope that there will be an increase in the share price over time, as stated in the “buy low, sell high” axiom. However, there are other ways to make money in the stock market other than share price appreciation.
How Do You Make Money in the Stock Market?
One of the prominent ways of generating money in the stock market is by selling the stock for a value greater than the purchasing price. This is referred to as capital appreciation. For instance, if you purchase a share for $350 from a company and sell it for $400, you have generated a capital gain of $50. But you have to sell your share to realize your profit. While you may have made $50 after the sale, you can no longer partake in the growth and future payments to shareholders by the company.
You can also make money in the stock market through dividends. Dividends are a payment of money usually every quarter by a company to its shareholders. You are entitled to any dividends paid by a company as long as you hold their stock.
You can either take the dividends as cash payments or use them to make reinvestment by buying more shares in the company and increasing your holding. This will make you entitled to more dividends in the next round of payment since the basis of payment is dependent on the number of shares you hold.
Most investors in the stock market generate money by simply making investments in companies that pay regularly and increase dividends.
However, you should note that it is not every company that pays dividends, and those that do pay are not obligated to do so. Dividends, just like a company bonus, are not guaranteed.
Conclusion
The stock market is an avenue for buyers and sellers to come together and exchange securities in the form of investments like bonds, shares, and debentures. Investors earn money in the stock market by selling shares for a greater value than it was purchased. Money is also generated through dividends paid by companies to their shareholders.
