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The stock market is a worldwide collection of exchanges, centralised marketplaces where shares of publicly traded companies are bought and sold. When you buy stocks, you’re purchasing partial ownership in a company, entitling you to a share of its profits and assets. Most retail stock trading takes place on major exchanges like the NYSE and NASDAQ, though CFD trading offers an alternative way to speculate on stock prices without owning the underlying shares. Stock exchanges exist worldwide, with national and regional exchanges spread across continents, each specialised in the listing of local businesses.
The stock market plays a fundamental role in the global economy, with over $110 trillion in total market capitalisation worldwide. Stocks come in many varieties, from large-cap blue-chip companies to small-cap growth stocks. Stock CFD traders can access the market using contracts for difference, allowing them to speculate on price movements of different shares without taking ownership of the underlying assets, or through direct purchases of shares.
What is a stock? A stock represents a unit of fractional ownership in a company, sometimes referred to as ‘owning a share’ in a business. Stock ownership entitles the holder to a portion of the company’s profits through dividends – regular, discretionary cash payments made to shareholders – and potential capital appreciation. Stocks are used by both traders and investors to generate returns through price appreciation and dividend income, while also providing a hedge against inflation. Of course, the value of stocks can go down as well as up, and dividend payments are never guaranteed.
What you need to know about the stock market
The stock market and stock exchanges feature some jargon that you need to understand. Some of the most important basic concepts are below:
Some of the peculiarities of modern stock markets stem from their historical development. Stock trading has been around for centuries, and in almost every generation has seen rapid technological change and market innovation. Understanding this history will help you make sense of how stock markets work today.
Joint stock companies date back to mediaeval France, but their shares were not publicly traded on an open market. The first publicly traded shares emerged much later, in 1611, when the Dutch East India Company became first company to issue its shares to the public. This innovation allowed the company to raise large amounts of capital while spreading risk across many investors. The shares were traded in Amsterdam, creating what is considered the world’s first modern stock exchange, and after 1700 or so more and more companies began to issue publicly tradeable shares.
The eighteenth and nineteenth centuries saw the establishment of major stock exchanges, including the London Stock Exchange (1773) and the New York Stock Exchange (1792). These institutions standardised trading practices and created more orderly markets. Initially, trading was conducted through an open outcry system, with traders physically meeting to negotiate prices, a system that continued until the 1980s and the advent of computerised trading.
The 20th century brought significant changes, including electronic trading, much stricter regulatory frameworks, and increased retail participation. The introduction of the NASDAQ in 1971 marked the beginning of fully electronic stock trading. Recent decades have seen further democratisation through online trading platforms, commission-free trading, and the rise of mobile trading apps. From the 1980s almost all major stock exchanges abandoned open outcry trading in favour of electronic execution.
Stocks are launched onto equity markets for the first time in a process known as an initial public offering, or IPO. A company that wants to go public, trading shares on the open market, approaches a bank or broker to act as an underwriter for their shares. The bank is then responsible for pricing, marketing and launching the stock float. The day where a stock goes public for the first time, or IPO, is often a keenly anticipated market event, although performance on the day can be volatile.
Stock exchanges and related organisations form the backbone of equity trading, providing essential market infrastructure:
The world’s largest stock exchanges are household names, and volume is concentrated in these key markets:
Stock market participants range from the technology companies and exchanges that provide the ‘financial plumbing’ to match, settle and clear trades, through to the banks, brokers and portfolio managers who study equities and make investment decisions.
The functioning of global stock markets is maintained by exchanges, including the large exchanges listed above, and clearing houses. Clearing houses are linked to exchanges and ensure that trades settle, with cash being converted into shares in an orderly fashion.
When you trade stocks, you don’t see the counterparty your trade matches with. That is because exchanges use something called a centralised order book, which pools all open interest and matches it to different buyers or sellers on the exchange. Even so, market makers are vital for ensuring liquidity in global equity markets. Banks and brokers continually offer to buy and sell a stock, profiting from a spread between their bid and quote offers.
If you check the largest shareholder of a given stock, in many cases you will find one of the big passive investment houses. Investment managers run pooled investment vehicles on behalf of their clients and are responsible for a large portion of overall trading volume. Passive investment managers design and balance funds that aim to replicate a stock index, while active managers try to beat them, using technical and fundamental analysis to make profitable trades. Investment managers vary in size, but the largest command enormous market positions, making these some of the biggest participants in the stock market.
Retail traders are highly active in share trading, both for short term speculation and long term investment strategies. Many people hold stocks in a retirement portfolio, often holding them in a fixed proportion with bonds to benefit from an uncorrelated hedge. Retail traders command less capital than investment managers, but can be highly sophisticated. Retail stock traders are active directly in cash equity markets, as well as trading index funds using ETFs, and other derivative products including CFDs.
Cash equities and stock CFD trading are different market activities, and choosing the right one is important. Buying shares is typically a longer term investment strategy, with traders holding positions for a few weeks, months, or even years. CFDs, on the other hand, are most useful for intraday trading, or holding positions over a short number of sessions. Whichever product you choose, when you start trading stocks it’s important to understand the trading day. Stock trading takes place within clearly defined hours set by the exchange where your stock is listed.
To know when you can trade a certain stock, you need to know the exchange it is listed on. This is true whether you are trading stocks directly or CFDs on equities. For example, if you want to trade shares of Boeing, which is listed on the NYSE, you will need to place your trade between 09:30 and 16:30 EST on Monday to Friday. The exact market hours of each exchange vary but follow a roughly similar patterns, opening between 08:00 and 09:30 and normally closing by 17:00. In some markets, the stock exchange may close for lunch, dividing the day into two trading sessions.
Stock market liquidity varies significantly between different shares. Large-cap stocks typically offer better liquidity with tighter spreads, while small-cap stocks may be more challenging to trade efficiently. Trading volume affects execution prices, and traders must consider market hours and session volatility when planning trades. Risk management is crucial for successful stock trading. This includes careful position sizing, using stop-loss orders, and maintaining proper portfolio diversification. Traders using leverage must be particularly mindful of risk, as it can amplify both gains and losses. Market volatility can spike during earnings announcements, economic data releases, or major global events, requiring traders to adjust their risk management strategies accordingly.
Understanding how the stock market works is essential for success in equity trading, whether you’re investing directly in shares or trading stock CFDs. Fortunately, ADSS has extensive resources that can help you master this market. Stock trading in Dubai gives you access to some of the world’s most innovative and important companies, allowing you to share in their performance and price action. If you feel ready to start placing trades, why not open a demo trading account today, and start trading without risking any of your capital?
What is the stock market and how does stock trading work?
The stock market is where shares of public companies are bought and sold through exchanges. Stock trading involves buying and selling these shares to profit from price changes or earn dividends. What makes the stock market unique is its ability to provide both short-term trading opportunities and long-term investment potential through share ownership.
How can beginners get started with share trading?
New traders can enter equity trading through various methods, including stock CFDs, direct share purchases, or ETFs. Stock market explained simply: you’re buying partial ownership in companies, either for long-term investment or short-term trading. Modern platforms make it easy to start stock trading in Dubai and globally, though beginners should start with a demo account to practise risk management.
What’s the difference between investing and active stock trading?
While long-term investors focus on company fundamentals and dividend income through share trading, active traders in the stock market often use technical analysis and shorter timeframes. What is stock trading’s main advantage over investing? It offers opportunities to profit from both rising and falling markets, especially when using CFDs. However, active equity trading requires more time, skill, and attention to market movements than long-term investing.