The purpose of a stock market is to bring together groups of people who wish to buy and sell stocks and shares and other related investment products. Within the United Kingdom, the main stock market is the London Stock Market or rather London Stock Exchange. However, there are major stock markets across the world including in New York, Germany and China.
On a constant basis throughout the day, lists of companies or indexes are published to provide an overview of the performance of companies within the stock market. Within the United Kingdom, the Financial Time Stock Exchange (FTSE 100 index) represents the performance of the largest 100 stock market listed companies within the UK. Many factors can affect the value of shares within a company including company specific factors (such as record profit levels, a change of management) or even political and general market factors.
There is also the FTSE 250 index, as well as the Alternative Investment Market which allows smaller companies to gather investment in a more loosely structured stock market environment. The constituents of the FTSE 100 (see HERE) and FTSE 250 can change depending on market performance over time.
In order to best understand the stock market, it is wise to comprehend some of the key terms that are commonly used within the respective area:
- Shares and Equities: The ownership of a very small piece of a Public Limited Company (PLC). If you are a shareholder of the company, you will be entitled to a share of the profits of the company, which will be in accordance with the amount of shares you possess. As a shareholder, you will also be to have some influence within the running of a company, for example through voting at annual general meetings. However, with the advance of electronic share trading, some of these rights are more difficult to obtain as shares are held in a ‘nominee’ account through a broker.
- Share Certificates and Nominee accounts: When purchasing shares, you may be issued with a share certificate which acts as legal proof that you own the shares. However, with the advancement of online share trading, many brokers will hold your share holding in a ‘nominee’ account in order to reduce the amount of paper work. It may be possible to gain a share certificate, but you should ask your broker about their terms and conditions for this.
- Brokers: Simple! Stocks and shares are purchased through a broker, just as you have insurance brokers, you also have stockbrokers.
- Market Capitalisation: This highlights the financial worth of a company that is listed on the stock market. To derive at a market capitalisation value, the current share price of the company is multiplied by the total amount of shares in existence.
- Dividend: Companies share profits with their shareholders via dividends, these are normally paid out twice a year (so long as there are profits!). Directors of a company will set the dividend to be paid out which has to be approved by shareholders.
- Bid and Offer Prices: When investigating the purchasing of shares, a broker will provide you with two prices; the bid and offer price. The bid price refers to the price at which you can sell the shares at, and the offer is the price that you can purchase the shares at. The difference between the two prices is known as the spread and the bid price is always lower than the offer price.
Further information regarding the London Stock Exchange can be found below: