How the Stock Market Works

Many people who have not experienced investing in the stock market may find it too complicated, that it is meant only for the smart, white-collared geeks, and corporate moguls. But the stock market works quite simply; it serves as a place where people trade stocks or shares of ownership in a desired company and where they can either win big or lose disastrously. In the US, there are two dominant stock exchanges – the New York Stock Exchange (NYSE) and the NASDAQ. This article briefly notes, in a simplified way, how the stock market operates.

Why Stocks Exist

Before understanding how the stock market works, you have to understand why it exists in the first place. Businesses of any size have projects they want to pursue, which they believe will be successful. Sometimes, they need capital beyond what they currently have but would not opt to take a loan from the bank. So they finance these activities by offering to sell shares of the company in exchange for the money they need. Companies sell shares of stock to the public through brokers in the stock market.

When they offer shares, they agree that company profits will be shared with investors. So when a company from whom you have bought shares of its stock makes money, so do you. But when they make losses, then you will lose as well.

How One Can Invest in a Stock

The first step to buying a stock is to contact a stock broker. Let the broker know how much stock you would like to buy for a specific publicly-listed company at the current price in the market. The broker will then place the order. If the company, or anyone who owns shares of the stock, agrees to sell to you at that price, the exchange will take place and the investment is made. The stock market can be seen as a form of legalized gambling, you can bet to get the stock you want for the price you have agreed upon. You may also buy stocks through the Internet, without leaving the comforts of your home, as there are numerous online stock exchange platforms out there that you can choose from.

How the Price of a Stock is Determined

The price of a stock, called the stock’s market price, is based upon its value. This “value” depends on various things: how well the business is making money, how much stock is available and wanted by investors, the trend of the industry which the company is a part of, and other factors. The better- performing business can have a higher price than the one that is not making that much profit.

How You Can Earn from Investing in the Stock Market

One of the ways people earn money is trading stocks. Trading stocks means that you are trading money for a certain stock. You buy stocks when the price is low. To profit from trading, you sell when the price is high. It is that simple. Because of this, many investors think of the stock market as a short-term investment strategy that can bring huge earnings or overwhelming losses. Aside from earning through trading, one can also earn income from buying stocks when the companies they invest in pay dividends to investors.