Once upon a time, in a land of endless meadows and beautiful woods, peacefully lived a bear and a bull. But they were not just two ordinary animals who would have wanted to live a typical life like others of their kind, eating grass and hunting prey every other day to survive. Ever since they were offsprings, they have been dreaming of becoming explorers and going on daring adventures, which was what no bear and no bull had ever done before. Their greatest success was finding a magical land of Stock Market, where their name is still well-known today. The end!
Even though my imagination decided to make the article’s introduction a bit different this time, my purpose is not to tell you a fairy tale, I promise. Nevertheless, the story you have just read is actually somewhat correct. Believe it or not, words “bear” and “bull” are very often used in the world of finance, especially when talking about the famous stock market, which is also the main topic of this article.
When a bear attacks, he uses his paws to push down his prey and defeat it. Therefore, a term “bear market” describes a time period when prices of stocks (or other securities which are not traded on the stock market, like real estate and currencies) fall for 20% or more. In between, prices can go up sometimes, but not much. As soon as they rise for 20% or more (without bigger drops in between), financial experts call it a “bull market”. The term comes from a fact that a bull attacks by pulling his horns up. Although the bull market is way more desired because it is usually a sign of thriving businesses and an abundance of jobs, it can not last forever. Well, the good news is that neither can the bear market. Therefore, it is not a question if the prices will rise or drop, but when will this happen. Although such uncertainty might seem a bit scary, I think it is what makes investing so interesting and exciting. Because the bull and bear markets can last for months or even years, it is crucial for investors to not only have some financial knowledge, but to also be extremely patient.
As I wrote in one of my previous articles Welcome to the Market!, stocks are investments with which investors become partial company owners. Now I would like to add that two terms, stock market and stock exchange, are not the same in meaning. A stock market is a global network of stocks that are being traded, whereas a stock exchange is a facility, a physical building in which those who trade, so sellers and buyers, connect and make deals. In addition, a stock exchange is an organization that enables companies to list their shares through a process called initial public offering (IPO) and begin offering them to potential investors. So, only one stock market exists, while there are numerous stock exchanges around the world, usually in bigger cities such as Shanghai, Tokyo and London. A company’s purpose of issuing shares is to collect a greater amount of capital and use it to execute bigger, expensive projects, like building new factories, opening new stores, or anything else that would be beneficial for the company’s development.
I remember I have once watched some finance-themed movie and one of its scenes had been filmed on the New York Stock Exchange (NYSE), which is one of the oldest and largest stock exchanges on the planet, and an American symbol of capitalism, according to The Wall Street Experience. In fact, somewhere between 2 and 6 billion shares are traded on the Exchange every day, according to Yahoo Finance. In the movie, the Stock Exchange was the place only for people with nerves of steel, and the strongest, loudest voice. There were men running across the trading floor, which was a huge but overcrowded place in the heart of the Exchange. Each one of them was yelling some numbers over the crowd to his colleagues or buyers and sellers they were trading with, but it was so loud that they could barely be heard. Although I have kept in mind that movies tend to make their scenes ten times more dramatic as they are in reality, it was surprisingly not the case with the movie I have watched.
Back in the old days, as long as four hundred and ten years ago, working days in stock exchanges all around the world looked very similar to those in the film. In the morning, a stock exchange’s ringing bell announced a beginning of a trading session, and its end in the afternoon. At the moment the market closed, prices were fixed and stayed the same until the next working morning. During the day, it took a whole team to calculate prices by hand, think quickly and make good deals before competitors, so with even just a few companies having had their stocks listed, the floor was practically full of traders. However, that began to change at the end of 20th century, when two innovations saw the light of day: computers and the Internet.
A lot of work became automated, communication between team members and clients was way easier (and much more vocal cord friendly) and trading was done more efficiently. Less mistakes were made when calculating numbers (especially a bid-ask spread, which is the difference between the bid (the offering price) and the ask (the asking price)). Hundreds of deals could be made in seconds with a help of a computer. But by far the biggest advantage was the accessibility. From then on, people did not have to physically go to New York or some other bigger city to trade or invest.
Gradually, practically anyone from anywhere around the world was able to become either a trader (who predicts the movement of a security’s price, buys it, and then sells it at the time when he would make most profit for himself or a client; trading is usually a short-time process), an investor (who does the same job as a trader, but makes more long-term decisions and therefore also reads companies’ financial reports and balance sheets to decide whether a certain long-term investment would pay off in months or years, or not), a dealer (who works for clients, follows their orders and only executes sales or purchases of securities) or a broker (who has a role of a middle man that connects a seller and a buyer).
If you want to trade and invest only for yourself in your free time, you have to meet two requirements in general. Firstly, you have to reach an age of maturity, and secondly, you need an investing account which you can open at a brokerage company, a bank or other financial institution. You can choose the traditional way and hire a professional broker who will do all the job, or you can use online brokerage platforms on which you can buy and sell stocks from different exchanges around the world or other securities by yourself. For every transaction you make, a brokerage firm or a bank will hold some of that money (usually around 1% or less) for itself as a commission for their service. Usually, you can receive financial advice from a professional broker from the company for an additional fee.
In some cases, it is possible to trade and/or invest even without a brokerage company or one of their platforms and avoid paying commission, especially when buying stocks. According to The Balance, some companies offer so called Direct Stock Purchase Plans (DSPP), which enable you to buy stocks directly from the company through their agents. If you already own some stocks and the company decides to pay you some extra money in a form of dividends, you can ask whether they offer Dividend Reinvestment Plans (DRIP) through which your dividend money would be automatically used to buy new shares. However, keep in mind that buying securities (especially stocks) without a broker is not so common, and even though it can look easy and less expensive, it might take much more effort and time on the other hand because every company has a bit different rules for this direct trading, which you would have to research all by yourself. Another way to purchase stocks directly would be that you become a certain exchange’s member. But, a number of members is limited, and even if you would get an opportunity to buy a seat, it would be, in most cases, extremely expensive (it may cost even millions of dollars), so if you do not plan to do investing professionally and earn a lot, it is in most cases not worth it.
Well, if practically anyone can trade and invest from their couch nowadays, why do we even need stock exchanges as places where people can make deals then? We actually do not. A vas majority of trading and investing is indeed done through electronic systems, according to The Wall Street Experience. Nowadays, the New York Stock Exchange is one of very few that still uses an open outcry method (meaning that trading and communication are done in person on the trading floor). As it is written in Quartz’s article, assurance of human traders is supposedly necessary especially during crises, and it is also a way of preserving traditional way of trading. However, most experts agree that a stock exchange with live trading is, believe it or not, primarily kept just for show. New York Stock Exchange, for example, hosts thousands of fancy events every year and numerous television reporters who like to broadcast news about the stock market with a trading floor in the background. In addition, many celebrities, famous businessmen and politicians are invited to symbolically ring a trading bell.
The bell above a trading floor still announces a beginning (usually around 9 a.m.) and an end (usually around 4 p.m.) of each trading day from Monday to Friday, except on holidays. Keep in mind that different stock exchanges around the world operate in different time zones, so not all exchanges will be open when your local ones are. Nevertheless, it is possible to trade even before and after regular (normal) trading hours, as Jake Broe explained. Trading in early (pre-market) trading hours or in extended market (doing after hours trading) can be a good option especially in a case of major securities’ prices changes due to breaking news or important announcements that large powerful companies make in that time. However, it also comes with several disadvantages. Because way less people trade outside regular opening hours (liquidity is lower), it is way harder for a trader or an investor to execute all purchases and sales he or she wants, and price swings may be way bigger and more unpredictable, often making the prices “unfair” (especially way too high). In addition, in the extended hours periods, mostly professional investors trade, so there is some tough competition next to you in the market.
It is interesting though, that not only stocks are traded on the stock market, according to Investopedia. Traders and investors can also buy and sell exchange-traded funds (ETFs), which are like baskets full of different types of investments including stocks, bonds and commodities such as gold or oil. What is special about funds is that multiple people pool their money and invest into them together. If you invest into a fund, you get instant ownership in all the securities that this fund includes. So if you invest into a fund that is based on S&P 500, you become an owner of each top 500 company’s stocks that are kept inside that fund. Some funds include even hundreds of securities (like stocks). Therefore, instead of making hundreds of purchases and paying commission to brokerage firms a hundred times, you can buy many stocks with just a few clicks and pay commission only once. In addition, you diversify your portfolio in this way and take on way less risk that your investment will be unsuccessful, because in a sea of securities, one or a few stocks’ crashes would not make such a difference. An advantage that specifically ETFs have is that they are the only type of funds which can be bought and sold anytime during the day when the market is open, and not just at the end of the day, like mutual funds for example. Investors and traders can also buy and sell corporate bonds on the stock market. By buying the bonds, they lend their money (like a bank) to a certain company which issued the bonds to quickly raise a greater amount of capital for bigger projects. Over time, the company returns borrowed money to investors who profit a bit because of an interest rate. In addition, derivatives based on stocks, commodities, currencies, and bonds are traded on the stock market. Those are contracts whose value depends on (or is derived from) something else (an underlying asset), according to Akota Asset Management. So, for example a cocoa farmer and a chocolate factory can make a deal that the factory will buy cocoa from the farmer based on a current market price – if the market price is low, the company will get cocoa cheaply, and vice versa, if the market price is high, the farmer will make great fortune.
From this example, it is clear that some benefit from the bull market, while others from the bear market, and there could be an endless debate about which one is better – for me, as long as I can have some chocolate in the end, both of them are winners.