How Stock Exchange Works: Guide for Beginners

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Published: April 22, 2021 by Andrew

In our in-depth analysis today we will explain in detail How Stock Exchange works.

If you want to invest in the stock market, things have never been so simple! Let’s be clear: knowing how the stock market works will not guarantee you easy profits but… it is certainly the ideal starting point for those who want to trade with the right wisdom.

For example, if you want to be successful on the stock market, you cannot fail to use the best brokers you can find online.

Precisely for this reason in the next lines we will talk, among other things, which are the best operators with which to invest in the stock market, such as eToro (official website) and Trade.com (official website).

Let’s start!

What is the Stock Exchange

The first thing we want to understand is what the stock market is.

The stock exchange is a financial market where financial assets are bought and sold. As with any traditional market, there are supply and demand logics that govern the price trend of listed assets.

It is therefore a more modern version of a traditional fruit and vegetable market, with some… noticeable differences!

If you have a habit of keeping yourself a little informed about what is happening in the markets, you have probably heard of words like Wall Street, Nasdaq, Nikkei or more. And maybe you have also wondered how the stock exchange works and how you can participate in exchanges in these “places”.

The main American stock exchange is located in New York, the London one at the London Stock Exchange. The Italian Stock Exchange is located in Milan, and is commonly known as Piazza Affari. In principle, all countries have at least one regulated stock market where the trading of financial instruments takes place.

How Stock Exchange Works

If you want to know how the stock market works, you have to start by imagining a large market where thousands of operators, every second, buy and sell securities.

Although these securities can be quite varied, up to and including bonds, government bonds, etc., in the collective imagination, understanding how the stock market works means understanding how shares work.

Lucky for you, figuring out how actions work is pretty simple!

Publicly traded companies sell their company’s shares to investors through digital platforms, who then resell them to other investors, and so on.

Owning shares in a listed company makes the investors “shareholders”, ie part of the owners of the company. If investors sell shares at higher prices than they bought at, they will make a profit. If, on the other hand, they sell for less than what they bought, they will incur a loss.

To buy stocks, the investor must contact a broker or investment platform.

How is the listing on the stock exchange

How do you get to be listed? If you have taken a look at the listings of one Stock Exchange, you will find that not all companies are regularly listed.

The reason is simple: in order to be listed on the stock exchange, companies must comply with specific requirements and make a specific request.

The operation with which the company is listed for the first time on a stock exchange is called an Initial Public Offering (IPO): with it, it offers shares (shares owned by the company) to investors.

Generally, the shares of the company that are placed on the stock exchange are only a part of its total ownership and therefore the price set for the shares in the first listing (as determined by a takeover bid) determines the value of the entire company.

Well, once listed on the stock exchange, the price of the shares can move regardless of the success of the company.

Do you want an example? One of the most obvious is Tesla: a company that is years away from stable profitability for its shareholders, but which has literally flown on the stock market.

So what makes the share price go up or down? The simple answer and, in part, we have already talked about: the power relationship between supply and demand.

Share price changes promptly reflect supply and demand and, therefore, when a stock is deemed desirable due to the company’s recent success, membership in a strong industry sector, or simply popularity for other reasons , then its price goes up.

If investors are unwilling to buy a stock due to the failure of the company, a weak industrial sector or the price that is simply deemed too high, the lack of demand will cause the price to drop.

At some point the price will move low enough for investors to be willing to buy again and the cycle will start all over again.

How do you invest in the Stock Exchange?

If you have seen any movies on the Stock Exchange, you have probably seen a scenario that belongs to the past or to particular occasions. In short, if you think that Wall Street is a room in which trading is initiated by an opening bell, followed by frantic trading in an area full of buyers and sellers, it is a fiction.

Today stock trading is done electronically, and the prevailing sound is silence!

This is great news, because you too, like all your fellow retail traders (non-professionals) can now participate in the stock exchange without going through intermediaries and banks.

Entering on a more practical level, therefore, you must know that if you want to invest in the stock market you simply have to use adequate, safe and reliable trading platforms (who would ever want to invest in the stock market with unauthorized or poorly transparent operators?).

Secondly, you have to choose a platform that is easy to use, which allows you to orient yourself correctly in the markets even if you have no experience.

Evidently, a good platform has to be free, and it doesn’t have to charge commissions every time you open and close a position.

We also believe it is very useful, especially for those with not particularly high capital to be allocated to trading, that the platform is accessible even from small amounts.

Best Platforms to Buy and Sell in the Stock Exchange

To make it easier for you to choose your new broker with whom to buy and sell on the Stock Exchange, we have briefly summarized the characteristics of the best platforms for trading on the Stock Exchange!

Platform: etoro
Min. Deposit: 200€
License: Cysec
  • Social Trading (Copy the best)
  • Simple and intuitive
  • ➥ Start
    1star 1star 1star 1star 1star
    Platform: xtb
    Min. Deposit: 400€
    License: Cysec
  • Free demo
  • Whatsapp Group
  • ➥ Start
    1star 1star 1star 1star 1star
    Platform: iqoption
    Min. Deposit: 10€
    License: Cysec
  • Free demo without limitations
  • Minimum deposit low
  • ➥ Start
    1star 1star 1star 1star 1star
    Platform: ubrokers
    Min. Deposit: 250€
    License: Cysec
  • Free Training
  • Zero Commissions
  • ➥ Start
    1star 1star 1star 1star 1star
    Platform: trade
    Min. Deposit: 100€
    License: Cysec
  • Free demo
  • Free course trading
  • ➥ Start
    1star 1star 1star 1star 1star
    75.80% of retail CFD accounts lose money
    Platform: forextb
    Min. Deposit: 250€
    License: Cysec
  • Free trading course
  • Free trading signals
  • ➥ Start
    1star 1star 1star 1star 1star

    eToro

    eToro is one of the best platforms for those who want to start investing in the stock market in a professional way. In addition to having a simple and effective program for trading, eToro will also give you the possibility to automatically copy what the best investors in its community do.

    In other words, thanks to the copytrading system you will be able to identify the traders who have obtained the best performances in the past and ask the broker to replicate all the operations they carry out in your portfolio.

    In this way you can get to have potentially very interesting results even without having any knowledge. And, at the same time, learn how to invest by observing what the best traders in the world do!

    You can sign up for free at eToro by clicking here!

    ForexTB

    If eToro is one of the best brokers currently existing in the world, ForexTB is certainly no exception!

    In fact, this operator offers a super-qualified investment platform, which will allow you to access thousands of assets: from stocks to indices, from commodities to Forex, from ETFs to bonds, you will have everything you want at your fingertips to be able to customize your better your investment strategy.

    You can sign up for free on ForexTB by clicking here

    Trade.com

    For many years Trade.com has been one of the favorite brokers of European traders who want to trade on the stock market in a simple but professional way.

    With so many tools to invest in, excellent investment platforms, lots of material to inform you with awareness of what is happening on the markets, we believe Trade.com a safe choice for those looking for a reliable broker.

    You can sign up for free at Trade.com com by clicking here!

    How Stock Exchange Works: the advantages

    The most obvious advantage of buying or selling shares is the possibility of making a profit from your investment. Profit is the growth potential of wealth through the appreciation of the value of the shares or financial instruments in which you invest, and which could be particularly high, or not, depending on the size of the movement.

    We also remind you that thanks to the use of the best online trading platforms you can also earn not only from the growth in the value of the shares, but also from their decrease. When you invest in CFDs, in fact, it is not so important that the share price increases, but that you are able to correctly predict the evolution of the values ​​themselves (even downwards!).

    In addition, with CFD trading your profit can be further amplified by the fact that you can invest in leverage, multiplying the result of your trade, with less fixed capital!

    Another advantage linked to the purchase of shares is linked to the dividend. In fact, most shares also allow you to earn dividends, or the periodic distribution of the profits accrued by the companies themselves.

    Let’s not forget about diversification, which is another important advantage of investing in the stock market, albeit neglected by many. An adequately diversified investment portfolio makes it possible to offset losses in one sector of the market with gains in another. Which means the portfolio has the potential to be profitable as a whole, even when things are partially bad for some stock or sector!

    Read also: Undervalued Stocks

    Strategies to invest in the stock market

    There are two different approaches to investing in the stock market, both of which are valid. The first approach is the one, more speculative and probably the most profitable, which consists in aiming for profit on each change in the price of a stock, both up and down.

    The other approach, called Value Investing, is valid more than anything else in the long term: it serves to build a portfolio of shares by buying them only and only when the price is low.

    Value Investing is based on a realistic assessment of the real value of a share, calculated from the company’s profit and book value.

    How Stock Exchange Works for dummies

    Now that you have some background information on the stock market and stocks, let’s take a short step forward by trying to understand how the stock exchange works in simple terms.

    Where to study the stock market? Definitely on a complete and detailed eBook, offered by the ForexTB Broker. It is one of the best Trading Books, perfect for learning the basics of investing:

    Download the free PDF Ebook here

    Which Broker to choose to invest in the stock market? In this guide we have selected 3, all of which are excellent for addressing investment in equities and markets in general. We suggest you download the free Demos of these brokers to understand which one will be our favorite!

    How much money does it take to invest in the stock market? With professional traders like Trade.com, € 100 is enough to activate a trading account. Different speech in the case of the “actual” purchase of the stock, but as we have seen between commissions and volatility the Cons outweigh the Pros.

    How to choose the best shares on the stock market? The study of technical analysis will give a great hand to select the best stocks, in addition of course to the use of indicators such as Price Earning (PE) or EPS (Earning Per Share).

    how stock exchange works

    How Stock Exchange Works Conclusions

    We have formulated several important ideas in order to understand how the stock market works and how you can invest in the stock market.

    To start investing immediately, simply complete the free registration on one of the brokers in the table, download the Demo (at no cost) and choose the platform we like best:

    Platform: etoro
    Min. Deposit: 200€
    License: Cysec
  • Social Trading (Copy the best)
  • Simple and intuitive
  • ➥ Start
    1star 1star 1star 1star 1star
    Platform: xtb
    Min. Deposit: 400€
    License: Cysec
  • Free demo
  • Whatsapp Group
  • ➥ Start
    1star 1star 1star 1star 1star
    Platform: iqoption
    Min. Deposit: 10€
    License: Cysec
  • Free demo without limitations
  • Minimum deposit low
  • ➥ Start
    1star 1star 1star 1star 1star
    Platform: ubrokers
    Min. Deposit: 250€
    License: Cysec
  • Free Training
  • Zero Commissions
  • ➥ Start
    1star 1star 1star 1star 1star
    Platform: trade
    Min. Deposit: 100€
    License: Cysec
  • Free demo
  • Free course trading
  • ➥ Start
    1star 1star 1star 1star 1star
    75.80% of retail CFD accounts lose money
    Platform: forextb
    Min. Deposit: 250€
    License: Cysec
  • Free trading course
  • Free trading signals
  • ➥ Start
    1star 1star 1star 1star 1star

    What do you think about it? We are curious to know your opinion. Let us know using the space you find in the comments and … good investment!

    What is the Stock Exchange?

    It is a financial market where the shares are listed. The shares represent part of the capital of a company.

    Why are stocks rising and falling?

    the Stocks follow the law of supply and demand. They increase when they are in great demand because the company is making profits, they decrease when there is little demand because the company has negative prospects.

    How do you make money on the stock market?

    Just buy when stocks rise in price, sell short when they fall.

    Is the bag suitable for everyone?

    Yes, even beginners can earn money on the stock market, as long as they work hard and study.

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