What is the Securities Market?

BlogNovember 9, 2021

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Security is considered a potential market, attracting many investors looking for opportunities to profit from idle capital. Securities investment is no longer a strange field, but understanding and grasping basic knowledge about the stock market is still a problem for many new traders. In this lesson, we will provide you with helpful information, helping you get an overview of what is the securities market and how does it work.

What is security?

Security is a financial instrument, an abstract commodity that can be bought, sold, held, or purchased on a securities market.

Securities is one of the most popular financial investment channels worldwide because of its higher profitability. For those new to this market, one of the first things you need to know is the different types of securities.

How does the securities market work?

The securities market allows buyers and sellers to negotiate prices and make trades. Specifically, the securities market works on the basis of interactions between the three groups like the diagram below:

In which:

  • The Securities Exchange – The publicly listed company applies to the securities exchange so that they can be allowed to offer shares of stock to the public. The company must comply with extremely strict requirements before the investments are opened to the public. The duty of the Securities Exchange is also to protect the investor and safeguard their interests.
  • Broker – Investors do not directly purchase on the Securities Exchange but Brokers. Only brokers licensed by the Securities Exchange are allowed to buy and sell shares of stock. This was done simply for control purposes and work simplification. The Securities Exchange prioritizes monitoring of Publicly Listed Companies while Brokers deal with the investing public.
  • The Investor – You will have to open a trading account on a broker to buy or sell shares of a particular company. For this, the broker will charge a very small fee for the transaction. Brokers sometimes also provide you with information on which companies are good to buy in addition to their transaction services.

So in summary, this is how the Stock Market Works: (1) The Securities Exchange monitors and screens companies who would want to become publicly listed. (2) Investors do not directly purchase on Brokers. (3) Brokers become the middle man between the Securities Exchange and investors.

Which instruments are traded on the securities market?

There are 3 types of instruments traded on the securities market, including:

  • Stock
  • Bonds
  • Index

Stock

A stock is a security that represents the ownership and legitimate interest of the stockholder in the assets or capital of the company.

When a company wants to grow its business, it raises capital by issuing stocks. When you buy stocks, you own part of a company. Depending on the number of stocks you buy, if the business grows effectively in the future and the stock goes up, you will make a profit from the company. The more stocks you own, the more profit you receive.

In addition, when you hold certain stocks of the companies, you will also be shared dividends. Apple, for example, paid a dividend of over 3 dollars for each stock last year. This is also the reason why so many people are interested in stock investing to grow their health.

Example: Google Corporation issues 1,000 shares. If you own 01 shares of Google corporation, it means you own 0.1% of that corporation. If you own 500 shares, you own 50% of this company.

Bonds

A bond is an instrument of indebtedness of the issuer (government or business) to the lender (investors).

In addition, investors often track the stock market’s performance by looking at a broad market index.

When you buy bonds, you’re lending money to a company. In return, you will receive periodic interest payments and your principal—initial investment—back at the date of maturity.

For example, Apple Corporation issues 100 bonds with a price of 1 billion USD per each. The interest rate of 10%/year, so you will be paid 100 million USD in interest each year. and the maturity term of 03 years. The loan term is 03 years, and the total interest for 03 years is 300 million USD. When the bonds mature, Apple corporation is obliged to return the initial investment of 1 billion USD to you.

Compared to stocks, bonds are typically considered safer investments because bondholders have a higher claim on the issuing company’s assets in the event of bankruptcy. In other words, if the company must liquidate all its assets, bondholders will be paid before common stockholders.

Index

An index is an indicator or measurement of change in a securities market, a group of assets, or a basket of securities.

For example, the S&P500 and the Dow Jones Industrial Average are two of the most well-known stock market indexes. In which the S&P500 represents the performance of the top 500 US companies.

Indexes are viewed as the benchmark of stock market investments. Investors only need to look at them to make a judgment, not considering each type of stock. Investors can trade directly on these indices. When investors have a general opinion of the market situation with positive signs, they need to buy an index. The amount will be divided equally among the top stocks, which is more convenient than buying individual stocks.

When investing in stocks, investors face risks associated with a specific company or business. However, when trading indices, investors’ portfolios are automatically diversified with many different stocks.

Investiki.com

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