How does the investment world function?

We define the very essence of stocks, shares, online trading, private equity and venture capital to give you a brief overview of key investing terms.

13:05 18 November 2014

Understanding the investment world may seem daunting to those with no direct experience of working in it, but as something that has a significant impact on how the economy performs the investment world is worthy of some study.

To get a better understanding of how the investment world functions, it makes sense to break it down into a number of individual processes and to then reflect on how they operate, as different processes within the investment world operate in very different ways. 

Stocks and shares

A share is, at its most basic, a tiny bit of a company. Share prices – which in the case of publically quoted companies are shown on a stock exchange – vary according to a number of factors. These can include the general state of the economy, the performance of the company itself, and the attitudes of investors towards the company and/or the industry in which it operates. If a company records a profit, it has the option to share those profits among its shareholders in the form of a dividend. Alternatively, a company can save its profits or choose to reinvest them in the business.

Many investors choose to use the services of a brokerage house or a licensed broker to buy and sell stocks, and the broker will charge a commission for the use of their services. Brokers can be present on the trading floor of a stock exchange or they can make trades for their clients over the phone or electronically. Each order to buy shares is matched to an order to sell shares, and vice versa.

Online trading

With the development of the Internet, online trading has become increasingly popular. Individual investors conduct the trades themselves and decide which stocks they want to buy and sell, without using the services of a broker. However, some online brokerage firms offer investors the option of receiving advice from their brokers as well as facilitating broker-assisted trades for investors reluctant to do it all themselves.

Private equity and venture capital

For companies with high-growth potential, private equity and venture capital are financing options. A private equity firm will, in general, seek to take a majority stake in an underperforming business with future growth potential and work with management to improve its prospects. In contrast, venture capital firms will look to invest in companies at the start-up and early development stages. Both private equity and venture capital firms take a long-term outlook, typically of around five to seven years.

Learning about the investment world from the experts

As can be seen from the different processes outlined above, the investment world offers businesses the opportunity to raise finance and attract investors in a number of different ways.

To see the investment world at work in practical terms, it is worthwhile examining the success of individual businesspeople who have utilized the various investment options available to them to great advantage. For example, Seychelles businessman Mukesh Valabhji has used his investment vehicle, Capital Management, to make various investments in regional businesses and to partner with other investors. A look online at resources such as MukeshValabhji.org.uk will give novice investors a sense of the kind of opportunities he has capitalised on in his career.

Understanding the ins and outs of the financial world and how it functions may not seem directly relevant to some people’s lives, but the investment world impacts everybody, from its effect on pension-fund performance to the effect of stock market performance on the overall economic mood of a country.