Stock Market Investing:How Stocks Work

You have defined your objectives, understand the importance of putting your money to work and know your investment capacity. Now that you have the foundations for moving towards financial independence, the next step is to understand the investment vehicle on which we will focus: the stock market.

Before analysing companies, looking for dividends or selecting growth stocks, you need to build a firm foundation. In this guide, you will learn exactly what the stock market is, how prices are formed and how it operates day to day, so that you can take your first steps with a solid base and better judgement.

What is the stock market and how does it work?

Contrary to common misconceptions or the way the market is often perceived, the stock market is neither a game of chance nor an abstract system. It is a financial infrastructure that allows anyone to own a fraction of global companies such as Apple, Coca-Cola or Microsoft.

Why do stock markets exist?

Stock markets exist mainly to connect companies that need capital to grow with investors who want to earn a return on their money.

When a company wants to expand, build new facilities or research new products, it can issue ownership interests, or shares, to raise funds. In return, the investors who buy those shares become co-owners of the company and participate in its future results.

How is a share price determined?

A share price is determined by the constant interaction between supply and demand in real time.

• If demand exceeds supply: more buyers than sellers are interested at that price, so the price tends to rise.
• If supply exceeds demand: more sellers than buyers are willing to trade, so the price tends to fall.

In practice, the stock market works like a continuous auction. The price quoted on your screen represents only the most recent point of agreement between a buyer and a seller.

What is the difference between the primary and secondary markets?

To understand where you actually trade as an investor, it is essential to distinguish between these two environments:

Primary market

This is the market where a company issues new shares to raise capital. This happens when a company goes public for the first time through an Initial Public Offering, or IPO, but it can also happen later through new issues or capital increases. In this market, investors’ money goes directly to the company.

Secondary market

This is the market in which you will trade day to day. Existing shares are exchanged between different investors. Money moves only between buyers and sellers, without the company receiving those funds directly.

What are the world’s main stock exchanges?

Although you can invest globally from a computer or phone, assets are listed on specific financial exchanges. Some of the most significant are:

NYSE (New York Stock Exchange)

One of the world’s largest and most influential financial exchanges, where many industrial companies and established multinationals are listed.

Nasdaq (United States)

The main stock market for large technology and innovation companies.

Euronext (Europe)

The pan-European structure that brings together exchanges including those in Paris, Amsterdam and Brussels.

Other significant exchanges

The London Stock Exchange (LSE), the Tokyo Stock Exchange (TSE), and Latin American markets such as the BMV in Mexico, the BVC in Colombia and B3 in Brazil.

What is a share and what does it mean to be a shareholder?

When you buy a share, you are not acquiring a simple symbol on a screen, but an economic interest in a real business with operations, employees, products and customers.

What does buying a share mean?

Buying a share means becoming a shareholder in the company. This gives you a series of rights according to the class of shares you hold:

• The economic right to participate in future profits if the business grows.
• The right to receive periodic distributions of profit if the company decides to pay dividends.
• The right to vote at shareholder meetings, for ordinary shares that include this right.
• The right to the company’s residual value in the event of liquidation, after all its debts and obligations have been settled.

What is a ticker?

A ticker, or stock symbol, is a unique alphabetic code that identifies a company in the financial markets. For example:

• AAPL: Apple Inc.
• MSFT: Microsoft Corporation
• KO: The Coca-Cola Company
• JPM: JPMorgan Chase & Co.

This code is the key search term you will use on your investment platform to find and buy a company’s shares.

Growth stocks and dividend stocks

Within the stock market, companies differ according to how they use their profits. To keep things simple, at Scale & Own we will initially focus on two approaches that correspond to the main strategies in the training:

Growth stocks

These belong to companies that tend to reinvest a significant part of their profits to fund their development and expansion. For the investor, the main objective here is to seek to benefit from the possible long-term increase in the value of their shares.

Dividend stocks (cash flow)

These generally belong to more mature companies that regularly distribute part of their profits to shareholders in cash. For the investor, this type of share can form part of a strategy aimed at generating periodic income.

Many companies can combine growth and dividend payments over their history. Both approaches meet different needs, wealth-building stages and profiles, which we will explore in depth in the following modules.

How do you make money by investing in the stock market?

There are two main ways to earn returns in the stock market when investing in listed companies.

Capital appreciation

This occurs when the value of the company increases over time and its quoted share price rises above your initial purchase price.

Example: if you buy a share for $50 and, after the business grows, sell it several years later for $80, you make a capital gain of $30 per share.

Receiving dividends

This occurs when the company decides to distribute part of its net profits periodically among its shareholders, whether monthly, quarterly, semi-annually or annually.

Example: if you own 100 shares in a company that distributes a dividend of $2 per share each year, you will receive $200 a year in your account as passive income.

Reinvest to benefit from compounding

Returns obtained through capital gains or dividends can be reinvested repeatedly. By reinvesting your gains, you put the new returns to work alongside your initial capital, benefiting from the compounding effect described in the introductory guide.

What moves share prices?

A share price fluctuates constantly because expectations about companies’ futures change. To understand these movements, it helps to analyse the factors at four levels:

Over the long term, a share price tends to reflect the real development of the business. Factors such as profit growth, debt levels, cash-flow generation and the quality of the management team are key determinants of a company’s value.

Industry trends directly influence the companies within it. Technological innovations, changes in consumer preferences or sector regulations can benefit or harm an entire group of competing companies.

Global factors such as interest rates, inflation, GDP growth or geopolitical tensions affect the economy as a whole and can influence overall market prices in the short term.

In the short term, prices often move because of emotions such as enthusiasm or fear. The equity market reacts not only to current data, but also to what investors expect to happen in the future.

What is volatility, and what are the risks of investing in the stock market?

Before putting your first dollar into the market, you must understand the difference between daily price fluctuations, realising a loss and the permanent loss of capital.

What is volatility?

Volatility measures how frequently and intensely the price of an asset changes over a given period.

Seeing the price of a share rise or fall in a day is normal market behaviour. Volatility reflects continuous trading between buyers and sellers, but daily changes do not by themselves determine the quality of a long-term investment.

Volatility, realised loss and the risk of permanent loss

To manage your emotions in the market, you must distinguish clearly between three different concepts:

• Unrealised loss: this occurs when the market price of your investment falls below your purchase price, although you have not yet sold. The decrease in value exists at that moment, but the loss does not become effective, or realised, until you decide to close the position.
• Realised loss: this occurs when you sell your shares at a price below the purchase price. At that moment, the accounting loss is made final in your account.
• Risk of permanent capital loss: this is the fundamental risk of investing. It occurs when the economic value of the underlying business is irreversibly destroyed, for example because of a serious deterioration in the business model, insolvency or bankruptcy.

Learning to live with daily volatility and keep your focus on analysing the business over the long term is one of the key skills for investing with sound judgement.

What returns has the stock market historically delivered over the long term?

Stock-market investing should be approached with the aim of obtaining sustained long-term returns, avoiding false expectations or promises of getting rich quickly.

Historical returns and reference data

If we use as a historical reference the records of the S&P 500 index, which includes 500 of the leading listed companies in the United States, over periods spanning a century and compiled in established financial databases such as S&P Dow Jones Indices or NYU Stern:

Historical nominal return

It shows an average close to 10% a year, including the full reinvestment of dividends over multi-decade horizons.

Historical real return

It has historically stood at around 7% or 8% a year after allowing for average long-term inflation.

A note on rigour

These figures represent historical averages observed over periods of 20, 30 or more years. They are included strictly for information and illustration and are neither a guarantee nor a promise of future returns.

An average does not mean earning the same return every year

An average long-term return does not mean that the portfolio rises by exactly that percentage every twelve months. In real stock markets, years of significant falls alternate with years of strong rises. The historical average is the result of staying invested and remaining consistent over time.

How does the stock market work day to day?

Unlike other digital markets that operate without interruption, organised stock markets have clear opening hours, closing hours and operating rules.

Trading hours

The stock market usually operates from Monday to Friday, excluding official holidays. The most closely followed exchanges internationally are those in the United States:

Regular trading hours (NYSE and Nasdaq)

9:30 a.m. to 4:00 p.m., New York time.

Outside regular hours, some platforms allow trading during extended sessions, in the pre-market and after-hours periods. In other cases, submitted orders remain pending until the next official session opens, depending on the intermediary and the type of order used.

What happens when you submit an order?

The operational process after a decision to buy follows these basic steps:

• You enter the order details on your investment platform: company, number of shares and order type.
• Your platform sends the order to the relevant stock market.
• The market’s system matches your request with a compatible sell order.
• The trade is executed, ownership of the shares is updated in your account and the required funds are settled.

What do you need before you start investing?

Before making your first market transaction, make sure you have structured these three basic pillars:

Suitable available capital

Make sure you use only available personal capital that you do not need to cover your day-to-day expenses, short-term commitments or emergency fund. As we explained in the previous guide, if you are an entrepreneur, this capital should come from income that you have already taken out of your business after covering its own operating needs and reserves.

Basic knowledge of financial analysis

Before investing in a company, it is important to have a foundation that allows you to understand how its business works, analyse its financial position and assess whether its share price seems reasonable in relation to its value. You do not need to be an expert, but you do need to understand the main concepts.

There are also tools that can help you automate part of the analysis, gather financial data and identify opportunities more quickly. Throughout the training, we will see how to use them to simplify the process without replacing the investor’s understanding or judgement.

Defined objectives and risk tolerance

Make sure you have calculated your investment capacity and are clear about your time horizon. The clearer your personal plan is, the more calmly you will be able to face market fluctuations.

An investment platform (broker)

To access the secondary market, you need to open an account, usually free of charge, with a regulated financial intermediary called a broker.

What is the next step?

Now that you understand the structure of the stock market, how prices are formed and how returns are earned, the next step is to understand how investing works in practice, without needing to start investing yet.

In the next module, we will show you the platform we use at Scale & Own, Interactive Brokers (IBKR), and you will learn how a buy order works and how it is executed step by step. Later, you will acquire the knowledge you need to analyse and select your own investments.

Continue to Module 02 · Learn to use Interactive Brokers (IBKR) and execute an order →

← Back to the pathway

Investing

• What is the stock market?
• What is a share?
• How do you make money in the stock market?
• What moves share prices?
• Volatility and risks
• Historical returns
• The stock market day to day
• What you need to begin
• Next step

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