In layman’s terms, it is a market where stocks are traded—as opposed to other types of financial markets such as the foreign exchange market where currencies are traded or commodities where physical goods are bought and sold.
A stock market does not have to be an actual physical location; it can simply be a collection of buyers and sellers trading securities online with each other using various electronic systems.
These days most exchanges take place on an online platform.
A ‘trader’ buys or sells shares in companies he believes will increase/decrease in value over time, whereas a ‘speculator’ believes that these movements will happen within a shorter time frame and typically does not employ fundamental analysis when buying/selling shares.
The most popular securities traded in the stock market are stocks, bonds and derivatives such as futures and options.
All this means that when you buy a share in a company, you own a tiny fraction of that business, just like how if you buy an apartment, you own a small fraction of the building.
The value of your ‘share’ is determined by supply and demand: if more people want to buy than sell, the price goes up; conversely, if more people want to sell than buy, the price goes down. These two concepts together form what we call ‘market sentiment.’
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Legalities
The Dutch Act governs stock trading in the Netherlands on Financial Supervision (‘Wet op het financieel toezicht’). Within this act, companies that trade stock are considered financial institutions.
This means that they fall under the authority of supervision and must comply with relevant laws and regulations.
The most recent change to the law occurred in July 2011, when a new ‘stock market master plan’ (Masterspoor) was announced.
One of the things included with this law is a ban on naked short selling – described as “selling securities without owning them.” The idea here is to prohibit investors from making money based on falling share prices rather than investment strategy or economic insight.
What you Need to Know?
With all this in mind, if you want to get involved in trading stocks, there are many things to consider before entering the ring.
1. Licensing Requirements
The first step for any beginner is to ensure they have all required licences and registrations before participating in these activities. Like other financial institutions, stock trading companies need to be registered with authority for the Financial Markets (AFM). The AFM website has information on applying for specific insurance policies, including investor protection insurance which also covers clerical errors in your account that result in incorrect prices being quoted or orders not being executed. However, it’s worth noting that this policy does not cover losses incurred by price movements in securities. Additional licensing requirements depend on what activities are being undertaken. For example, you need to have a bond or deposit if acting as an investment firm, trustee or consultant.
2. Insurance Requirements
Insurers are required by law to check the valid insurance policies of financial institutions before engaging in business transactions with them. This is done to ensure that the stock trading company has the correct insurance coverage for what it’s doing and isn’t operating beyond its means.This also helps protect investors should something go wrong with their transaction. Financial Institutions must have extra investor protection measures in place if they offer services that involve processing client money, including brokerage accounts, foreign exchange platforms or share dealing platforms where transactions are executed electronically.
3. Legal Validity
Another issue that often arises when looking into regulated markets is the ability to enforce contracts and agreements. If one party fails to fulfil its obligations, what legal resources does the other party have? This issue is significant in financial markets where contract details must be precise, and there can be a time lag before an agreement becomes binding. The Dutch Act on Financial Supervision contains specific rules about transactions carried out via regulated marketplaces such as Euronext Amsterdam, the official exchange for all securities listed. These provisions ensure that all legal agreements made through them will always remain valid regardless of issues such as bankruptcy or payment problems
4. Transparency Requirements
The Ministry of Finance has implemented new regulations concerning transparency requirements for participants in these markets, including employees, board members and supervisors working at exchanges and other marketplaces. Key employees, in particular, must be fully aware of relevant rules and have a good understanding of their responsibilities. They must keep abreast of new developments without being affected by them emotionally, especially given that markets tend to be very dynamic.
Financial Markets
- Dutch Act on Financial Supervision
- Euronext Amsterdam
- AFM (Authority for the Financial Markets)
- Investor Protection Insurance
- Naked short selling