How does the stock exchange work?

In this post, we would like to explain to beginners what a stock exchange is and what the basic rules are for stock exchange trading. Get basic knowledge for a successful first trade. You will also learn which assets you can trade on the stock exchange and how you can make a profitable investment as a beginner.

The stock exchange for beginners – easy explanation

Buying and selling – that’s the only thing outsiders understand about the stock market. You know the picture from movies, where stockbrokers and traders were trading on the floor, shouting to each other and making stock exchange deals. Today, the stock exchange buildings are empty and the trading floor is digital. The stock exchange is an impenetrable jumble of financial jargon and foreign words that are off-putting, at least at first impression.

Basic rules of stock exchange trading

On the stock exchange, prices for traded assets are formed exclusively according to supply and demand. This means continuous changes in prices. A successful trader tries to make a profit from the difference between the purchase price and the selling price. In addition, the return (income) from stock exchange trading increases due to dividends (part of the profit) and interest paid on certain securities.

What is an index?

An index is a grouping of selected shares. The price of the shares of different companies changes continuously. In order to monitor and track the price fluctuations, the index documents the price trend in a ratio. The composition of the various indices depends on which shares are to be monitored. Therefore, indices are grouped by sectors, countries, companies, strategies or markets.

Trade with raw materials

It is not only industrial companies or governments that trade in commodities. Institutional and private buyers have also entered the trade. As a result, demand for these commodities is rising on stock exchanges around the world:

Foodstuffs – such as meat, grains, plants and fruits, oils and fats, dairy products
Luxury foods – such as tobacco, coffee, tea, cocoa
Raw materials  – such as natural gas, gasoline, oil, cotton, rubber, aluminum, lead, nickel, zinc, copper, tin
Precious metals – such as platinum, gold, silver, palladium

The effects of the increasing demand for raw materials are not only felt by the companies that are active on the market as buyers or sellers or that process the raw materials in their products. Private consumers are also quick to notice the relationship between supply and demand for raw materials when the price of coffee rises or the baker increases the price of their favorite bread. In some regions, food shortages can even occur if the price on the stock exchange for a particular commodity rises sharply due to high demand. For this reason, food trading in particular is regularly criticized by consumer advocates and market analysts.

Well informed trading with shares

In times of low interest rates, trading in stocks can be an alternative for a high-yield investment. However, investors need to be well informed about stock market trading in advance and learn the basics. With regular exposure to stocks and securities, even small investors can earn money from stock trading or build up a retirement provision.

Stafford Thorpe provides financial services to clients so we can protect and grow their wealth over time.


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