How Does the Stock Market Work? A Guide For Beginners
Understanding the stock market can be quite daunting for a beginner. But to understand how it works, you must try to understand the mechanics behind the market. So how does the market work?
An exchange works on the basic principles of supply and demand. The main players are the buyers and sellers, who determine prices through their trading behavior, and the brokers, who facilitate stock trading. Understanding how a stock market works is the first step in understanding how to invest in the market for financial gain.
What are Stock Market
A stock, also known by the terms share and equity, represents ownership in a company. When companies want to expand their business and need capital to do so, they often put parts of the company up for sale publicly and ask them to buy a "share" of the company. Thus, all individuals holding shares in a company are collectively the shareholders, co-owners and receive a percentage of the company's profits in the form of dividends. Therefore, the stock is an investment tool for the shareholders and a financing tool for the company.
How Does the Stock Market Work Like an Auction House?
The market works like an auction house as shares are sold to the highest bidder. Buyers bid on stocks and sellers sell the stocks at the current stock price. The stock is sold to the highest bidder. The stock price is determined by the fluctuations between demand and supply. In general, a company that is doing well financially will see more demand for its stock than a company that is experiencing financial difficulties. The same is true for the economy: a recessionary economy will see lower demand, while a healthy booming economy will see high investment demand.
Stock Trading Basics
Shares are traded on the stock exchange (also called the stock exchange). This is a place where brokers facilitate orders from buyers and sellers.
Today, stocks are also traded electronically, so while the movements of the stocks are not physically visible, they can still be tracked digitally. Many people find it easier to invest in and monitor their stock portfolio over the internet as it is updated in real time.
It is important to note that while a company will publicly share its first stock directly through an IPO (Initial Public Offering), the shares traded on the stock exchange have no direct participation from the company and are merely a transaction between the buyer and the buyer represent seller.
What are Stock Quotes?
When you open the financial pages of the newspaper or visit one of the numerous online financial websites, the first thing you will probably see is a table with many alphanumeric values in columns and rows. This is a stock chart. The stock table includes the following information: company name, company 3-letter ticker symbol, the highest and lowest price for that stock over the past week (or other time frame), the dividend paid out, the stock yield calculated as a percentage of dividends per Year divided by the dividends per share, the stock's closing price, and the net change in the stock's dollar value (whether positive or negative - where positive is denoted by a green up arrow and negative is denoted by a red down arrow)
How Does the Stock Market Work to Determine Stock Prices?
Prices are representative of demand and supply. High stock demand combined with low supply pushes prices up while a low demand combined with high supply makes prices go down.
Perhaps the most important question is how to determine whether the price of a particular stock will go up or down. Understanding how the stock market works will help you to determine the stock's price trends and place you in a better position to make your fortune on the stock market.
The Concept of Stocks
Simply put, one share of stock represents partial ownership of the company issuing it. There are two kinds of stocks issued - preferred stocks and common stocks - each with unique properties. Often, preferred stockholders are provided with more benefits than common stockholders in, say, the order and amount of dividends issued on one share.
Similarly, there are also two values attached to stocks - par value and market value. Par value is the price of the stock as set by the company while market value pertains to the price of the stock as determined by market forces. For example, a share of stock may be valued at par for $1 but its market value may reach as high as $100, thanks to market dynamics at work. This can also work in reverse since the same share of stock can be virtually worthless in the current market.
Stocks are the foundation upon which the stock market works since it is the basic commodity being traded, bought and sold in the billions daily. Once you have understood the concept of stocks, you are better prepared for the answers to the question of "How does the stock market work?"
The Concept of Stock Trading
Stocks are sold and bought in venues known as stock exchanges, with said transactions conducted by licensed stockbrokers. Take note that the buildings housing the New York Stock Exchange and NASDAQ, two of the world's most prominent exchanges, are heavily restricted from unauthorized personnel.
Fortunately, the power of the Internet has made it possible for ordinary citizens to dabble in the stock market without actually being inside the stock exchange buildings. Plus, you have the stockbrokers and the market makers to do the dirty work of finding sellers and buyers, as the case may be, for your stocks.
Your stockbroker will only execute a transaction upon your orders or upon your predetermined criteria, which means that you still retain control over your shares of stocks. He/she earns commissions from each successful transaction while you earn profits from favorable spreads.
Of course, your profits will also come from the difference between your purchase price and your selling price of the same shares of stock, usually over a long period of time. For example, if you bought shares of Microsoft stock when it was just a startup company at $1 per share and you decided to hold on to it, you will recoup your initial investment hundreds of times over today when Microsoft is a powerhouse company.
