For most non-experts in financial investment issues, the stock market is and will continue to be the main reference when thinking about financial markets. After all, stock markets such as the IBEX 35, the Down Jones, the Nasdaq or the London Stock Exchange are still the most pronounced names when talking about the so-called “markets”.

And yet, although everyone is more than accustomed to hearing their names and seeing how the actions of this and that company rise and fall, it is not so easy to fully understand the operation of the stock markets. Therefore, to fully illuminate these spaces that are usually known as bags, we will first begin by explaining what the bags are.

What is the stock market?

The Exchange is a kind of organization in which companies, states and private investors sell and buy different financial products in relation to these three actors. Thus, for example, a publicly traded company will put its securities open for sale to any type of investor, while the governments of each country will sell the State Bonds, a financial instrument with which they can thus obtain liquidity.

The concept of the current stock exchange nation between Belgium and the Netherlands more than five centuries ago, and today includes numerous financial instruments of great variety, including derivative financial products so booming in recent years : CFDs, swaps, futures, etc.

How does the stock market works?

In the stock exchanges there are three main participants:

  • The intermediaries , who act as an intermediate point and link between companies or states and investors.
  • Investors .
  • The companies and states .

Companies that go public must first make their most recent financial data public. After this, they mark a price on their shares and open the sale of these shares to the public. Depending on the interest shown by investors and depending on the law of supply and demand, the price of these shares will rise or fall, marking the subjective value of the company.

Thus, for example, the actions of a company with great value and reputation like those of Microsoft, will be tremendously expensive compared to those of a firm that is very poorly valued, such as, for example, the Popular Bank.

From these basic conditions, what investors will look for will be to benefit from fluctuations in stock prices and securities sold on the exchanges. If, for example, an investor thinks that the Banco Popular’s securities are about to hit a raise, they will proceed to buy them for the sale price at that time: say 2.50 euros. However, the rush will occur and the shares of Banco Popular (for reasons that can be very diverse, from new quarterly company data or new legislation that will make life easier for banks in Spain) will be sold to 5.25 euros, as they will be more attractive to investors. There, the one who bought them for 2.50 can sell them and make a profit of 2.75 euros for each share purchased.

Also noteworthy is the role of intermediaries in explaining how the stock market works. These offer investors an entrance to the financial markets in exchange for a fee for such work.

Derived products

In recent decades, in parallel to the business of the stock and currency markets, a series of products have also been created, which allow access to financial investment without the need for such a large capital investment.

These are, for example, elements such as CFDs, futures or swap. Its main characteristic is that the investor in question does not need to possess such instruments to operate on its results, hence the name of derivatives.