What is the difference between an active and a passive investor?
6:22
(CNN Spanish) --
The US stock market suffered a sharp drop this Wednesday, which has caused concern among investors about rising inflation and a possible recession.
The Dow Jones lost 3.6%, making it its worst day since June 2020. The S&P 500 fell 4% and the Nasdaq Composite plunged 4.7%.
In the midst of this context of volatility and investor concern, news related to the markets may still sound very distant to you.
If so, here's how stock markets work and why they're important.
What are stock markets?
According to Monex, a Mexican company specialized in the financial sector, the stock markets, which are also known as stock exchanges, are the places "where investors buy and sell company shares."
And it really doesn't just cover stocks and companies.
"Debt or capital instruments" are placed on the market, says the Institutional Stock Exchange (BIVA), among which are shares, bonds, credits, among others.
However, in order not to make this more complex, we will say that the stock market is where an investor can buy the shares that an institution or even a person puts up for sale.
The stock, which we already defined as a debt instrument, is equivalent to a small part of a company (basically, if you buy a share, you buy that small part of the company and hope that its value increases).
If it is a government bond, for example, the investor lends money to said administration, with the promise that it will be paid in the future with interest.
advertising
In commercial jargon, the person who buys a share or other debt instrument is usually called an investor or investor;
The institution or third party that sells is known as the issuer.
Asian markets fall on tension between Russia and Ukraine 0:59
How do they work?
Monex explains that the securities markets have the technological infrastructure to carry out purchases electronically.
“If you want to sell a stock, your stockbroker implements a sell order (electronically).
The transaction is completed when the position of one participant coincides with that of another”, that is, when the investor and issuer agree on the price to be paid, mentions the financial group.
With very few exceptions, adds Monex, the purchases and sales of the securities market are electronic, this in order to monitor operations and identify investors and issuers to provide greater security.
What is SWIFT and why it could be Russia's most feared weapon
Why does the price of a stock go up or down?
Stock markets work, in part, based on the law of supply and demand.
If a lot of people are looking to buy shares of a single company, they will go up in price because there is a lot of demand for them.
However, if few people are buying the shares of another institution, these lower their price and, when this happens, the issuers can choose to sell them so as not to lose their initial investment.
When purchases are made, the stock is said to be up or green;
when issuers sell, they say the stock is down or losing, or in the red.
In other words, when everyone wants a stock and buys it, it gains value;
but, when they are selling a lot of the shares of a company, they lose their value.
It should be noted that there are external factors that determine the buying and selling decision of issuers and investors.
An example is what is now happening on Wall Street.
The US Federal Reserve (Fed) has made no secret of its intentions to raise interest rates this year, which has investors worried;
likewise, international situations such as the tension between Russia, the US and Ukraine also affect the markets.
What does Russia demand of the US and its NATO allies to resolve the crisis with Ukraine?
As investors hope the Fed will soften its talk on a possible interest rate hike, all three major US markets rose simultaneously on Wednesday, something not seen since January 11.
However, everything could take a turn when the Fed reports on its latest monetary policy.
With information from CNN's Anneken Tappe
Stock MarketsWall Street
