How Does the Stock Market Work?

downloadBefore you start investing in the stock market it is a good idea to ask yourself, “How does the stock market work?” The answer to this question is simple. Companies go public by offering a specific number of shares in their company to the public through the stock exchange. Investors then can use the stock exchange to buy and sell stocks of companies that they are interested in. While this basic description of how the stock market works is adequate enough to understand what the stock market is, to get a better understanding of how it actually works it will be important to learn about some of the terms that are commonly used when discussing the stock exchange including stock prices and market capitalization.

The first term that you may hear when you start learning about how the stock market works is stock prices. Stock prices are the price that a specific stock sells for. This price is set by several market factors including the health of the economy, trading trends, spending trends, and financial or technical reports put out by a company or an independent third party. The next term that you may hear about is market capitalization. Market capitalization is the value of the company or the stock that is being offered. To calculate the market capitalization of a company, or stock, simply use this formula: The number of outstanding shares X the price of the stock = market capitalization of the company.

How Does the Stock Market Work? – Investing 101

After the markets up and downs these days, the question of “How does the stock market work?” is an often asked by a lot of people. one, especially amongst those who have little to no background in finance and economics.  Fortunately, the stock market is not as complicated as it seems with its bewildering array of numbers flashing on giant screens and brokers shouting quotations at the top of their lungs.

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.images (1)

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. So, now that you have the basic answers to the basic question of how the stock market works, it is time to expand your investment portfolio from the usual savings accounts.  With the right decisions borne of experience, you will earn thousands more in profits than you will probably have in interests.

A stock exchange is an organization, usually a corporation, that brings together stock brokers and traders by giving them facilities to carry out trading of stocks, other securities and other financial instruments. Does that sound so abstract? For a clearer picture of what is stock exchange, think of a market building and what you see inside. You see sections. Each section’s facilities define whom it caters to. The fresh meat and fresh fish sections have large freezers for storing raw meat; the produce section has coolers and display cases; the dry goods section has stock shelves for displaying items. People come to this place to buy and sell food items. A stock exchange is basically that. Although its sections, called markets, are not trading physically transferable goods and the markets per se are essentially not physically present within the building, a stock exchange is a virtual marketplace where sellers (issuing corporations or organizations) and buyers (traders) do their business.

But unlike ordinary marketplace, the prominent persons in a stock exchange are middlemen called stock brokers. They are regulated professionals who do the buying and selling of securities on behalf of investors. More often than not, stock brokers play the role of investment advisors to their clients. If you don’t understand what is stock exchange and how it works but would like to put your money where it gives you more than a regular savings account would, you’d want to go to a stock broker. But can you eliminate the stock broker from the picture? Find out more about stock exchanges and stock brokers with Forex Tracer, an automated investment advisor that works much like a real live one does.

How Does the Stock Market Work – The Stock Market For Beginners

download (1)How does the stock market work? How do investors use the stock trading to increase their wealth? Let’s have a quick look at the fundamentals behind the stock market and then you will never again have to ask how does the stock market work.

Warren Buffet once said that “The stock market is simply the transfer of wealth from the impatient to the patient”. What does Warren Buffet (the greatest investor of all time) mean by this quote? Apart from the obvious I think what he really means is that it is the truly educated investor that will be able to take advantage of the stock market. So I highly applaud anyone that is trying to find out how does the stock market work before you start putting your hard earned money into stocks that you know little about. I think the stock market is very similar to the ocean. It shouldn’t be feared, rather it should be greatly respected and if you treat it with respect it will bring you great happiness.

So how does the stock market work? Well when you buy a share you are effectively buying a tiny little piece of a company. I know it may sound weird but that is exactly what happens. For instance did you know that if you bought enough shares in the one company eg. Coke or IBM then you would actually own the company. Now this is never ever going to happen for a number of reasons but I tell you this to explain the concept that buying a share is literally buying a little piece of a company. People often ask me how to buy stocks and is it hard. In this day and age it is an incredibly easy process that takes a matter of seconds. Once you know the stock market basics and have set up an online account there really is nothing to it.

OK so now you want to know how does the stock market work to make people rich. This is where things get a little bit more complicated because there are so many different ways that investors use shares to make profits. In fact for many investors it doesn’t even matter which way the stock prices move – up or down. They will use stock market news & stock trading software to still make a profit. In many cases they can make a bigger profit when the market is falling.

So to truly answer the question know how does the stock market work to make people rich I think you need to start learning about some of the exact strategies that investors are using. For instance ‘Buy and Hold’ is the most common strategy used by most mum and dad investors. To be honest it isn’t really a strategy, in fact I’ve heard people describe it as ‘Buy and Hope’ which is probably a better description. Many people sell ‘Covered Calls’ (sometimes know as share renting). This is a very good strategy that normal people have used with great success. You can use CFD’s or options to create leverage but these are definitely no stock market for beginners strategies.

With all of these strategies the same principle applies. You buy something when it is cheap and you sell it for a profit.  I know that sounds very simple but it is the truth. As with all investing the idea is to make money and the only way you are going to do that is buy buying something that is going to appreciate in value. The next step in you learning about how does the stock market work would be to try and find a stock market for beginners book or to do a stock market course. There are hundreds of stock market courses out there that will teach you all about the different strategies to use. The most important thing to remember is to get a good education about shares and the stock market before you start investing your own hard earned money. Remember what Warren Buffet said “The stock market is simply the transfer of wealth from the impatient to the patient”. So make sure you are patient and truly understand how the stock exchange works before you start transferring your money to the patient.

Understanding the stock market can be pretty daunting for a beginner. But to understand how it works you must try and understand the mechanics behind the market. So how does the market work? A stock market works on the basic principles of demand and supply. The key players are the buyers and sellers who determine prices through their trading behavior and the brokers who facilitate stock trades. Understanding how a stock market works is the first step to understanding how to invest in the market for financial gain.

A stock, also known by the terms share and equity, represents ownership in a company. When companies want to expand their business and require capital to do so, they often turn to putting up parts of the company for sale to the public and asking them to buy a “share” of the company. Thus all the people who hold shares in a company, collectively the shareholders, are part owners and receive a percentage of the company’s earnings in the form of dividends. Therefore, stock is an investment tool for the shareholders and a financing tool for the company.