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Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 69% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money.

The stock market: what is it and how does it work?

If you want to invest, you’ll need to know all about the stock market – which can seem intimidating at first. Here, we’ll answer all your questions about the stock market.

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Get info fast via our instant help and support portal. Available for account queries, ProRealTime, product info and more.

Visit help and support for more information.

Call 0800 409 6789 or email helpdesk.uk@ig.com if you have any questions about trading or investing. We're available 24/7 between 8am Saturday and 10pm Friday.

Contact us 0800 409 6789

Call 0800 195 3100 or email newaccounts.uk@ig.com to talk about opening an account.

Contact us 0800 195 3100

Get info fast via our instant help and support portal. Available for account queries, ProRealTime, product info and more.

Visit help and support for more information.

Get info fast via our instant help and support portal. Available for account queries, ProRealTime, product info and more.

Visit help and support for more information.

Call 0800 409 6789 or email helpdesk.uk@ig.com if you have any questions about trading or investing. We're available 24/7 between 8am Saturday and 10pm Friday.

Contact us 0800 409 6789

What are stocks?

Stocks are a type of financial asset you can buy, and represent a share of ownership in a company. The name for the unit of ownership you’ll purchase is ‘shares’.

If you buy shares on the stock market, you and any other shareholders now have a stake in that company. This means you’re entitled to voting rights in business decisions. It also often means you share in the company’s successes by getting dividends – a proportionate payout per share in any profits, if the company you’ve invested in pays dividends (some don’t).

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What is the stock market?

As the name suggests, the stock market is where shares are bought and sold. It’s the marketplace within which the ‘merchandise’ of company stocks is exchanged between parties.

Rather than a place with vendors at various stalls, the stock market is a single abstract concept that refers to all the sales of stocks around the world.

What is a stock exchange?

A stock exchange, on the other hand, is far more specific. Stock exchanges are physical buildings and legal entities within the various countries of the world. They’re the forum and the platform where companies’ stocks are sold and bought by investors, stockbrokers, funds and other ‘shoppers’.

Some of the biggest and most popular stock exchanges in the world include the United Kingdom’s London Stock Exchange (LSE), famous American exchanges like the New York Stock Exchange (NYSE) and the Nasdaq. There are also several, well-known exchanges in other parts of the world, such as Germany’s DAX (standing for ‘Deutscher Aktienindex’) and Japan’s Tokyo Stock Exchange (TYO).

Image shows the flow of activities in the stock exchange whereby a company listed on the exchange puts up its securities for investors to buy or sell them.

How does the stock market work?

Picture a traditional marketplace – vendors selling their wares, while buyers mill in between the stalls looking at what’s on offer, negotiating pricing and purchasing goods, or trading one item for another. This is very much the way the stock market works – just in a digital, online form.

Companies looking to make more money or create cash flow for their business will list its stock on an exchange (in a form called securities) for other entities to buy. If buyers are interested in owning shares in that company, they’ll purchase them. All this happens on and through the stock exchange.

Like an old-fashioned market, the buyers (you as an investor via a broker, or a fund via an asset manager) will assess a stock. You may then offer to purchase it at what’s known as the ‘buy price’. This is the amount a stock is worth at any given time as determined by supply and demand and conditions of the overall market. Whatever amount the stock goes for, that’s called the share price.

Once the deal goes through, you as the shareholder can in turn sell the stock you purchased to another entity via a broker. This can be for a higher amount than you paid for it to make a profit, or for a lower amount to make a loss.

Stock exchanges, like markets, are public venues – so a company needs to list their stock on an exchange as a public entity. Companies are publicly listed and ‘debut’ on an exchange in a process called an initial public offering (IPO for short).

What’s a primary stock market?

A primary stock market isn’t an exchange, but rather a specific time in the life cycle of a stock. The first-time stocks are publicly traded in an IPO is on the primary stock market.

Once an IPO has been completed and a stock is officially listed on an exchange, its shares can be publicly traded on that stock exchange. This is known as a secondary market.

What is a stockbroker?

A stockbroker is the person who deals for you on the stock exchange.

Just like only public companies as sellers can list stock on an exchange, only registered buyers can interact on the stock exchange. This means you as in individual can’t personally buy shares on a stock exchange – you’ll have to use a stockbroker to execute your deals for you.

A stockbroker is an entity legally authorised to buy and sell on a stock exchange, and they’ll do so on your behalf, usually charging a commission for their services.

To use a stockbroker, you’d typically open a share dealing account. Your funds to buy and sell shares, as well as any of the ones you’ve bought, will be held in this account. The account is also where dividends will be paid into.

We’re an example of a stockbroker, as we enable you to buy or sell on an exchange. This means you’ll tell us which investments you want to make and we’ll carry them out for you. Stockbrokers like us may also offer managed portfolios: these are portfolios that invest in a collection of ETFs and are managed for you by our experts.

How to buy and invest in shares

  1. Research the stocks you want to buy
  2. Open an account with a stockbroker
  3. Place your order
  4. Monitor your position

1. Research the stocks you want to buy

The first step is to choose the right stock for you, at a share price you consider to be good value. You’ll need to conduct fundamental analysis and technical analysis and really study the market to make an informed decision. You can even use our market screener tool to help narrow down your search.

2. Open an account with a stockbroker

You’ll need an account with which to invest. We keep the process to just four steps:

  • Fill in a short form on your investing and trading knowledge to ensure you get the best experience
  • Get verification – this usually takes just a few seconds
  • Deposit money into your newly created account, for free, to start investing in the stock market

3. Place your order

You can then open your first position on our share dealing platform by placing an order.

4. Monitor your position

Once you’ve placed your deal, you’ll need to keep an eye on your investment to determine when the right time to close your position is. If you’ve bought shares, that means selling them on our platform.

What affects the prices of stocks?

Share prices are affected by things such as supply and demand, macroeconomic factors, and industry classes. The most common factors are:

  • The latest earnings results reported by the company, eg revenue or profits
  • Company news, either positive or negative
  • Trends and sentiment in that company’s industry
  • Changes to monetary policy in the country where a stock is listed, eg interest rate hikes
  • Macroeconomic events in the market at large like recessions, bull runs, etc

What is market volatility?

Market volatility is how much assets’ prices rise and fall, and how rapidly, and it’s also a significant factor affecting stocks’ pricing. When prices tend to rise and fall sharply, suddenly, that’s when a market is considered volatile. When prices don’t fluctuate significantly and move comparatively slowly, that’s called a ‘flat’ market.

The more volatile a market is, the more profits and losses you can make and the faster they can happen. For this reason, it’s often wise to choose stocks at first that move relatively little (ie are flat and have low volatility) if you’re still new on your stock investing or trading journey.

What are the risks of investing in stocks?

For all the benefits of investing in shares, there are risks, too. This isn’t in and of itself a bad thing – there is no reward without risk. Rather, you need to know and manage your risk to reap all the rewards that being a shareholder can bring.

These are the ones you’ll most likely face if you choose to invest in stocks:

  • Investment risk is the blanket term for all of the possible risks your stock will face. It simply means the danger of incurring losses or a lower-than-expected return on investment
  • Business risk is the dangers faced by the company you’ve invested in, and could in turn affect the share price. An example would be significant management restructuring or cash flow constraints in the business
  • Unsystematic risk (also known as idiosyncratic risk or specific risk) is just a fancy term for risks that are unique to a particular company. If, for example, you’ve invested in a company that’s CEO is known for wildly affecting the share price with their social media posts, that’s an unsystematic risk that stock poses
  • This particular example above is called headline risk – the danger that negative publicity for a company will impact their share price
  • Liquidity risk is the chance that you’ll encounter circumstances that mean you need to sell your stocks in a hurry, to increase your liquidity, and may not get a good price for them as a result
  • Market risk is much more general to the macroeconomic environment. It’s the ongoing risk of the market fluctuating up and down, affecting your stock’s prices
  • The broad umbrella term for risks that affect not only your stock, but all assets, is systematic risk – risks that plague the whole financial system
  • One type of systematic risk is commodity price risk. This occurs when extreme fluctuations in commodities’ prices have a knock-on effect on stocks’ prices
  • Inflation risk is the chance that a country’s rising inflation, which causes the value of money to decrease. Because of this, the monetary value of your stocks’ worth can lessen
  • Legislative risk is also on a national level. It means the chance that government decisions, for example increased red tape or regulatory burdens for corporates, will in turn affect the bottom line of businesses and their stock prices

FAQs

How do I buy stocks?

To invest in stocks, you can buy shares in a company via a broker’s platform – for example, with us. You can buy and sell US shares commission-free, and UK shares for as little as £3 per trade on our platform.1 If you’d prefer to trade on stocks instead, we’re the No.1 CFD trading platform in both the UK and the world.2

Can anyone buy stocks?

Yes and no. Anyone can buy shares, but individual investors can’t buy them directly. Instead, you’ll need a stockbroker, an entity legally authorised to deal in securities, to make the transactions on your behalf.

Where is the stock market?

The stock market isn’t specific place, like Wall Street. Rather, it’s an abstract term that encompasses all of the exchanges, and the stocks listed on them, in the world. These days, this means that the stock market is largely a digital, online phenomenon.

Is there a minimum amount for stock investing?

With us, you can set up a share dealing account for free and invest for just £3 on UK shares, with a foreign exchange fee of just 0.5% and zero commission on US shares.1 However, there’s a minimum of €10 and A$10 for European and Australian shares and a minimum charge of $15 on US stocks. See our charges for more details.

Is stock investing risky?

Yes, there’s risk associated with investing in stocks – but without risk there are no rewards. The chance to make a profit inevitably goes hand in hand with the possibility of making a loss. The trick is to know the potential risks and plan for them. We’ve included a handy list of all the most likely risks that stocks face in the section above.

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Discover the ins and outs of how to begin investing in shares with us

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1 Trade in your share dealing account three or more times in the previous month to qualify for our best commission rates. Please note published rates are valid up to £25,000 notional value. See our full list of share dealing charges and fees.
2 Based on revenue excluding FX (published financial statements, October 2022)