Introduction to Finance
The world of finance is primarily about investing in stocks and shares. This activity takes place in the so-called 'stock market'. Traders buy and sell stocks and shares at exchanges, such as the New York Stock Exchange.
The trading capital of the world is Wall Street in New York. Trading can take place anywhere in the world through a variety of online services. However, Wall Street is where the art of stock trading was born in 1792.
There are several news channels that specialize in bringing viewers the news stories that are of most concern to the stock market. There are different investing styles that investors utilize when trading. Some people are in for the long haul, and others want to make money quickly and reinvest that money.
The particular stock market strategy that an investor chooses to adopt will determine which stocks he includes in his portfolio. Research can improve his chances of making a significant amount of money. However, the market is very volatile. As in the world of sport, anything can happen on Wall Street.
The market fluctuates based on investors’ confidence. It goes up and down depending on how investors are buying and selling their stocks. Betting on finance is very exciting, but it’s one of the most stressful things to bet on in the world because of the unpredictability.
Rules & Gameplay of Finance
In the stock market, knowledge is power. But that power should never be abused, and there are actually laws against such misuse.
Insider trading is the buying or selling of stock on the basis of information that isn't available to the general public and is illegal. Unfortunately, some investors find a way to get around the rules and do it anyway.
A person who participates in insider trading is using their knowledge to manipulate the market. This type of advantage is illegal and is classified as criminal activity. Some examples of insider information are leadership changes, product issues, or company scandals that would cause the stock to plummet.
How Insider Trading Occurs
Usually, people in positions of power commit financial fraud through insider trading because they know CEOs who have companies listed on Wall Street. It is usually successful traders who are charged for insider trading. However, anyone with unknown information can be penalized if they illegally use it for their benefit.
Insider trading doesn't work in the long run because of the unpredictable nature of the stock market. Additionally, it’s a criminal activity, so it will be punished. Government agents are always looking out to spot white collar stock market crimes and prosecute those involved.
A Legal Definition
The United States Securities and Exchange Commission defines insider trading as “buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security … violations may also include ‘tipping’ such information, securities trading by the person ‘tipped,’ and securities trading by those who misappropriate such information.”
If you do enough insider trading, you will be caught, so it’s best to make financial gains legally, even if this is a slower process.
Insider trading laws were published following the Stock Market crash of 1929. This crash led to the Great Depression that shook the United States to its core. Congress passed the Securities Act in 1933, which made insider trading illegal in the United States.
Congress continued to add to the country’s insider trading laws in 1934 when they passed the Securities Exchange Act. If a person breaks the regulations cited in these laws, they could face up to 20 years of jail time as well as a $5 million fine. A business that commits market fraud could be hit with a $25 million fine.
Depending on the extent of insider trading, a person may just receive a financial penalty and no jail time, but this is rare. One of the most notable cases of insider trading occurred with Food Network star Martha Stewart. She was jailed in 2003 when she received inside information from her financial advisor at Merrill Lynch.
She served three months in jail for her crime. Insider trading happens every day, but eventually, criminals are caught and punished. If you stick to the rules and do legal research, it will pay dividends in your financial portfolio.
How the Financial Market Works
If you are unaware of how the stock market works, information spewed from financial advisors could cause confusion. At a basic level, the stock market’s framework is a straightforward concept.
The stock market is similar to a big auction. Buyers and sellers negotiate stock prices and make trades accordingly. There are multiple stock markets in the United States. The two most common markets are the New York Stock Exchange and the Nasdaq.
Companies list portions of their companies through an initial public offering which is known as an IPO. Investors buy the stocks, which causes demand. High demand causes the price of the stocks to rise. When a company’s stock increases, it is becoming more prosperous through the market’s investors.
Supply and demand determine the price of a stock. Buyers and sellers negotiate stock prices amongst themselves, which causes the market to fluctuate. Computers do most of the stock calculations because of how many IPOs are on the market.
The market moves too quickly for people to mark the price of every publicly held company. Stock market trades used to occur in person before computer algorithms were created, but this is no longer the case.
Financial Strategy & Tactics
Many strategies are used in the stock market based on an investor’s goals. Yet, there are still some general tactics that the majority of investors utilize to make market gains. The best way to invest is to focus on the long term. Quick profits do not pay like long-term growth.
The best portfolios have a mix of safe stocks that will grow over time while mixing in some risky short-term stocks. Short-term stocks can be very beneficial, but they can also cause you to lose a lot of money because of their risk.
The safe decision is relying on long-term growth through secure mutual funds. No matter what type of stocks you invest in, you have to do your research to succeed. Insider trading is illegal, but plenty of free tips are available through investing websites and market futures.
You should also try to buy and sell at the right time. This is not easy, but it’s necessary for successful trading. If you sell too late, you could lose a lot of money. If you buy too early, you could pay more for a particular stock than you would have if you waited a little longer.
Acting at the wrong time can devastate your portfolio. Another tip to have a great portfolio is to diversify the stocks you are buying. When the market crashes, sectors usually drop together. If you diversify your portfolio, you may be able to weather a financial collapse.
Because of the stock market’s volatility, you should only invest money you are willing to lose. The market always increases over time, but you can lose a lot of money in the short term. Never invest money that you are loaned in the market because you may never get that money back. This is especially true if you are looking to day trade.
The final thing that you must do is stay on top of your investments. Focus on the investments you constantly make because the market is always changing. If you are making risky investments, you need to pay attention to your stocks. Regular investing with a lot of studying is vital for success.
History of Finance
Stock market trading goes back beyond the creation of the New York Stock Exchange and Nasdaq. Stock markets started when countries began trading once the new world was discovered. Settlers wanted to start businesses, but they needed more capital than they could provide on their own.
Groups of investors came together to invest in businesses, and the concept of stock trading was created. The Dutch East India Company issued the first paper stock in 1602. Once modern industrialized companies were founded, stock trading rose to a substantial level.
Industrial corporations needed a lot of capital, so investing became very profitable if companies grew. The first stock exchange was founded in London in 1773. This idea grew in America after England established its own stock exchange. The first stock exchange in America launched in Philadelphia in 1790.
A stock exchange was opened in New York in the financial district in 1792. It was renamed the New York Stock Exchange in 1817 and moved to Wall Street. This opening was the foundation of today’s stock trading in the United States.
Distinctive Elements of Finance
Everyone can be involved in finance. People go to school and study to be stockbrokers, but this does not prevent someone from investing in the stock market. This is similar to sports betting in the way that everyone can bet on companies and then sell if the stock is underperforming.
The most distinctive element of the stock market is all of the companies that are listed. There are a variety of publicly held companies that all investors can invest in with their money. These stocks are all worth a different value, but the investing process is the same for all businesses.
Another distinctive element of finance is the type of investments that people can make on Wall Street. Some stocks are high risk, and others are safe. High risk comes with expedited rewards, but this is an easy way to lose money. Safe stocks do not generate as much money in the short run, but there is little fear that they will lose a lot of value.
Since finance is a very mathematical field, there are a variety of statistics involved in trading.
- Stock Market Value – Value of the entire market
- Most insufficient Month – Worst month of the year in the market
- Best Month – The best month of the year in the market
- Automation Percentage – How much of the stock market is automated
- Stock Value – Value of an individual stock
- Share Price – Price of one share of a stock
- Growth Percentage – Percentage of a stock’s growth in a certain period
- Decline Percentage – Percentage of a stock’s decline in a given period
Popularity and Cultural Impact of Finance
Finance is very popular because people love to make money. Money is necessary for survival, and the stock market is an excellent way for people to grow their financial portfolios. The stock market has been prevalent since its inception.
It has become an area where anyone who desires to invest can get involved. This has been the case because of financial trading apps that do not require a bank account to invest. The average citizen is gaining more power in the market in today’s world as well, which is causing excitement for the market to grow.
There are 47 stock exchanges globally, and over 50% of adults in the United States have money in the market.