The stock market allows you to receive passive income and realize a variety of financial goals: to save for retirement, buy a home, children’s education, just to multiply capital or even become an additional item of family income.
Financial literacy of the population is growing. At the same time, many people were not ready for the difficulties. The difficulties caused by the pandemic took them by surprise. In the absence of savings, it is necessary to raise money now. Of course, if there is such an opportunity.
That’s just because banks offer low interest rates. This makes contributions unprofitable. Despite the popularity of bank savings, many have shown interest in investing in the stock market.
Structure of the Stock Market
The stock market is a platform where various financial instruments are traded. Some are suitable for investors of any level. Others are used only by professional market participants. We cannot say that someone cannot invest. The main thing is to choose those instruments that are understandable and correspond to financial capabilities.
To understand how the stock market works, you should understand the main participants of the trade:
- Issuer – the name of the organization that places its securities to raise funds;
- Brokers – organizations that act as intermediaries between buyer and seller;
- Depository – a place where all securities at the disposal of investors are accounted for.
All participants get to the exchange. It acts as a trading platform. An investor who wants to buy or sell a security also comes here. And therefore, through a broker, he gives an order to place an application on the exchange.
When a counter-party appears, the exchange uses a clearing service. These are companies that make settlements between the parties to the transaction.
Finally, there is a depository. It records how many securities have passed from one investor to another. Now this process is automated and everything happens in seconds.
Market participants do not work on a charitable basis. They charge a commission for this. Therefore, you should study the tariffs and conditions when choosing a broker.
Many brokerage companies refuse additional payments and take them into account in the service fee. This allows you to calculate the costs more accurately.
What Can Be Purchased on the Stock Market?
Shares remain the most common financial instrument. There are other options besides them. Bonds and exchange-traded funds are very popular.
These financial instruments are best suited for those who are starting to invest. More complex assets are available only to qualified market participants. For example, structured notes or options.
Consider the three most popular options for novice investors:
- Stocks – after purchasing this security, the buyer becomes a co-owner of the company. Thus, he claims a share of the profits. Shares are earned through dividends or the sale of a security at a higher price than the purchase;
- Bonds – the purchase of a bond means the transfer of funds into debt. Debt obligations are placed by countries or companies. The receipt indicates the interest that will be returned to the investor. The most reliable bonds have a small percentage and rarely exceed a bank deposit;
- Exchange-traded funds – also known as ETFs. Here, specialized funds are engaged in portfolio formation. This may include various financial instruments. The investor acquires a share in the fund. The main advantage of such investment is diversification. Even if one asset falls in price, it will not affect the fund. The fall will be covered by the growth of other instruments.
How to Assemble an Investment Portfolio?
An investment portfolio is a long-term strategy of investing in various financial instruments. At the same time, assets can include different things. Including real estate, cars and precious metals. The composition of the portfolio will reflect how much risk an investor is willing to take. A large number of stocks indicates an aggressive approach aimed at growth. If it is dominated by bonds, it is a more conservative approach. It is more aimed at preserving available capital.
The first option should be used in case of long-term investment. In history, the stock market is constantly growing, with some corrections. A portfolio with bonds is more designed for the short term. It is investing in such instruments in order not to risk your finances. You should choose the optimal balance for yourself depending on the goals and timing.
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