As its name suggests, the stock market functions as a marketplace for investors to buy and sell stocks. Stocks are simply shares of ownership in a publicly-traded company.
Why companies issue shares
The idea behind buying stocks is to invest in solid, well-managed companies with good prospects. As the stock price gains in value, investors profit.
From a company’s perspective, selling shares to the public can raise the necessary capital to keep growing. This is most commonly achieved through an initial public offering (IPO) where proceeds are typically used to fund market expansions or product developments, among other things. After the IPO, the company becomes a publicly-traded company and its shares can be bought by almost anyone.
How are stocks bought and sold?
The stock market works through a network of stock exchanges. Globally, there are 60 major stock exchanges, with the New York Stock Exchange (NYSE) and the Nasdaq being the largest and most well-known.
To buy or sell stock on a stock exchange, investors typically go through brokerage firms. In recent years, almost all brokerage platforms have shifted online. Many also allow investors to buy stocks listed on foreign exchanges. This is a boon for investors who can now diversify beyond their local stocks.
Take note of commissions
One important thing to note is that each time you buy or sell a stock through your broker, you’ll need to pay a commission fee which varies by platform. In Singapore, you can expect to pay commission fees ranging from 0.08% to 0.28% of your transaction value. For smaller transactions, a minimum commission fee is applied. This can go as high as $25 per trade for certain brokers. These fees need to be factored in when evaluating your stock returns, so the lower the better.
How are stock prices determined?
While many stocks tend to increase in value over time, on a weekly or even daily basis, you’ll notice that stock prices are constantly moving up and down. We have the laws of supply and demand to thank for that.
A stock will see its share price increase as more and more investors want to buy the stock. The increased demand drives the stock price higher. At a certain point, interest in the stock starts to decline. Owners of the stock are now selling it to exit their investment and this excess supply pushes the stock price down. At a low enough price, interest picks up again, prices increase and the whole cycle repeats over and over.
It’s hard to time the market
Interest in a stock is in turn determined by various factors. These could be earnings reports, news headlines, political developments, the state of the economy, general hype, you name it. These pieces of information work to influence an investor’s decision to buy or sell a particular stock.
When you’re buying a stock, you may think that the stock price is going to go up. At the exact moment, the person selling you this stock is thinking that the price is going to go down. Who’s right?
This is why it is notoriously difficult to pick stocks and even professionals fail to get it right most of the time.
The smart way to invest in the stock market
The dangers of picking a stock that crashes are real, as anyone who has invested in Enron or Wirecard can tell you. Yet, numerous studies have shown that stocks generate superior investment returns over time compared to other asset classes.
One smart option is to go with exchange traded funds (ETFs). Instead of investing in a single stock, you’re invested in the entire stock market. If one stock underperforms, your exposure to the many other stocks held by your ETF will make up for it.
Get ETF exposure with Syfe portfolios
ETFs are bought and sold just like stocks, and you can trade them through your broker. But if you want an easier and more cost-effective option, you can choose a digital wealth management platform like Syfe.
You’ll get a diversified portfolio of around 15 ETFs based on your investment goals. Apart from our low fees, you’ll also benefit from our $0 brokerage charges. You can invest as regularly as you like without worrying about commissions adding up.
Eager to get started? Open an account now and start investing in minutes.