Stock markets can help you grow your nest egg. It could be a very important way to invest
So what exactly are these markets?
When people talk about the 'Stock Market,' they are commonly referring to both the physical location for buying and selling stocks as well as the overall activity of the market within a certain country. And when you hear an expression such as 'The market was down today' it refers to the combined activity of many stock exchanges i.e. the New York Stock Exchange (NYSE), Nasdaq etc. in the United States.
Instead of using the term 'Stock Market' for the physical location for trading stocks, it is more exact to use the term 'Stock Exchange.' Each country can have many different stock exchanges and usually a particular company's stocks are traded on only one exchange, although large corporations may be listed in several different locations.
Stock exchanges exist throughout the world and it is possible to buy or sell stocks on any of them. The only restriction is the opening hours of each exchange. Both the NYSE and Nasdaq for example operate from 9:30 a.m. to 4:00 p.m. Eastern Time from Monday to Friday. Other exchanges have similar opening hours based on their local time. If you want to trade on the Hong Kong Stock Exchange your order will be executed sometime between 9:30 p.m. and 4:00 a.m. New York time.
The major stock markets of the world are located in Japan (Tokyo Stock Exchange), India (Bombay Stock Exchange), Europe (London Stock Exchange, Frankfurt Stock Exchange, SWX Swiss Exchange), the People's Republic of China (Shanghai Stock Exchange) and the United States. The major exchanges in the US are the NYSE, Nasdaq, and Amex.
Stock markets closely follow the economic health of a country. When the economy is doing well the market is bullish. Bull markets occur during times of high economic production, low unemployment and low inflation. Bear markets, on the other hand, follow downtrends in the economy. Inflation and unemployment are rising and stock prices are falling.
Fluctuations in stock prices are also driven by supply and demand, which in turn are determined to a large extent on investor psychology. Seeing a stock rise in price may cause investors to jump on the bandwagon and this rush to buy drives the price even faster. A falling price can have the same effect. These are short term fluctuations. Stock prices tend to normalize after such runs.
The stock exchange is only one of many opportunities to invest. Other popular stock markets include the Foreign Exchange Market (FOREX), the Futures Market, and the Options Market.
The FOREX is the biggest (in terms of value of trades) investment market in the world. FOREX traders buy and sell currencies. They are trade one currency against another and can profit from small changes in value. Most FOREX trades are entered and exited quickly, usually in one 24 hour span. And traders have to keep a close watch on the market in order to make their profitable trades.
The Futures Market is a market of contracts to buy and sell goods at specified prices and times. It exists because buyers and sellers of goods wish to lock in prices for future delivery, but market conditions can make the actual futures contract fluctuate considerably in value. Most investors in the futures market are not interested in the actual goods – only in the profit that can be realized in trading the contracts.
The Options Market is similar to the Futures Market in that an option is a contract that gives you the right (but not the obligation) to trade a stock at a certain price before a specified date. They can be traded on their own or purchased as a form of insurance against price fluctuations within a certain time frame.
All three of these markets are quite risky and require considerable knowledge and experience to prevent substantial losses. They also require close attention to market movements. Stocks, on the other hand, are less risky because movements of the market are usually gradual. Although short term investment strategies are possible, most view stocks as long term investments.