What is the stock market (how does the stock market work)

 What is the stock market (how does the stock market work)

What is the stock market (how does the stock market work)

When it comes to the basic pillars of financial well-being such as earning, saving and investing, investing in the stock market seems the most intimidating. Aside from all the confusing terms that come with it, the stock market can be very volatile, with all the risks involved. This is why it is important to have an effective and transparent stock analysis tool that sifts through the latest financial statements and breaks down the strengths and weaknesses of the stocks you are likely to invest in. In this guide, we’ll help you understand what the stock market is and how it works so you can make the best decisions for you.

What is the stock market?
In short, the stock market is where investors can buy and sell securities, or stakes in individual companies as well as exchange-traded funds. The market concept is also used when trading other items such as bonds, but the stock market has the most public exposure of all the other markets.
The stock market is also known as the stock exchange, and the New York Stock Exchange (NYSE) and Nasdaq are two of the largest stock exchanges in the world. There are also plenty of other financial markets around the world including the London Stock Exchange, as well as Japan, Hong Kong, Shanghai, India, Australia, and various locations throughout the European Union and beyond.
Analysts track the performance of the market as a whole using so-called indices, which are tools that work by measuring the weighted average value of a group of securities. Some of the major indices in the world are the Dow Jones Industrial Average (DJIA), S&P 500, and Nasdaq. When the index goes down, it means the average value of all the stocks it includes is going down, and vice versa.
How does the stock market work?
You can think of the stock market as a safe and regulated auction house where buyers and sellers can negotiate prices.
The stock market is a network of exchanges where companies list their shares, and then investors buy and sell them among themselves. The investors may be major funds that control a lot of money or even individual investors.
You’ve probably seen scenes in movies or on TV shows where buyers and sellers are on the floor of the New York Stock Exchange exclaiming, “Buy, buy, buy!” or “Sell, sell, sell!” But while the stock market has historically been a physical market, these securities are often traded through a range of electronic trading platforms.
Major exchanges
When you hear the word “stock exchanges”, these are the actual markets where stocks are traded.
If someone is referring to the US stock market, they are often talking about either the New York Stock Exchange on Wall Street or the Nasdaq because they are two of the largest markets by market capitalization. Here are the five largest stock markets in the world:
New York Stock Exchange
Nasdaq
Tokyo Stock Exchange
Shanghai Stock Exchange
Hong Kong Stock Exchange

How does the economy affect the stock market?

There are many factors that may affect the performance of the stock market and whether it is moving up or down such as the political climate, social factors, interest rates, trends and shifts in investor preferences.
If the general public feels as if the economy is going to get worse soon, they tend to sell stocks because bonds and Treasuries provide a safer return. But when people feel confident and optimistic about the economy, they tend to buy stocks, taking more risks to get a higher return.
In other words, when people feel good about the economy, they tend to buy more stocks. Conversely, when things happen in the world that make them feel uncertain, they will be more conservative, and may gravitate toward lower-risk investments such as bonds.
What are stocks?
A stock is simply an ownership stake in a company or organization. There are two types of shares: private and public.
Public stock
A public corporation is a company that issues shares to the general public to buy and trade on stock market exchanges, just as it is the case with companies that go public.
private equity
Private equity is usually limited in number and generally not accessible to the general public. The stock is only held by a few people such as employees and internal investors, and it is not publicly traded on any stock exchange.
Types of common shares
There are several ways you can make money as an investor in public stocks:
common stock
Common shares are the most common. When you own a share of common stock, you will have a proportionate share in a company, based on the number of shares you own.
You can make money from common stock in two ways:

Through Dividends: These may be given by companies when they are profitable, and their income is greater than their expenses.
Through a share price: When the price goes up, the shareholder can make money by selling the shares.
When you own common stock, you usually have voting rights over who is elected to the company’s board of directors and among many other things. The number of votes you can cast depends on the number of shares you own, and you can vote either by proxy or by attending an annual meeting.
Preferred shares
Preferred stock will give you a fixed return for each share that the company needs to distribute before compensation is paid to common stock shareholders. But the downside to this type of stock is that you will rarely get voting rights.
Preferred shares are considered a type of fixed income due to the fixed rate of dividends that they pay, which makes them a reliable stream of income.
stock classes
When you hear a reference to a Class A stock versus a Class B or a Class C stock, this refers to the number of voting rights a shareholder has. Shareholders of Class A shares have a greater say than shareholders of Class B shares.
Market participants
The market participants who buy and sell stocks depend on which stock market you are referring to. There are actually three different types of markets in which companies, investors and their brokers can buy and sell stocks:
The main market
The principal or primary market is where companies sell their shares directly to investors. This happens when a company goes public for the first time, and it can also happen if the company later decides to raise more money by making more shares available in a new financing round.
Companies usually refrain from selling to individual investors at this point, rather they turn to large institutions such as pension boards, hedge funds and mutual funds that manage money for large groups of people.
Secondary market
This is where retail investors can buy stocks whether that involves buying stocks of individual companies or a combination of them in an exchange-traded fund. It is the market where individuals can make investments without spending hundreds of thousands of dollars on stocks.
Over-the-counter market
Major exchanges such as the NYSE, Nasdaq, and London Stock Exchange have certain requirements that companies must meet in order to be eligible for listing, which may include public filing of certain financial information as well as projections along with the need to maintain a certain share price.
If companies cannot or do not want to meet these criteria, then they have the option to sell the shares OTC as there is no public price and every transaction takes place between individuals, this is where the concept of market makers comes in.
If you are looking to sell a stock, an individual may be willing to buy from you at a certain price, and if you are looking to buy from them, the price will be different. Brokers and others who act as money market makers earn from the difference between the bid and ask prices.
The downside to OTC markets is that there is no set public price, and so the market is not very transparent. You need to trust the person you are dealing with, and be aware that they may act on information that you do not have.
Why do stocks go up and down?
There are a range of fundamental factors that can affect whether a stock moves up or down. But the most important concept is the basic law of supply and demand. When there is high demand for a particular stock, the price goes up, and vice versa.
The factors that drive demand boil down to data, company performance and earnings, but it can also be due to how investors view the company. If a company is seen as having a new product with great potential for example, its shares may go up.
Businesses can be adversely affected by economic conditions beyond their control as well. Stay-at-home orders during the pandemic caused an increase in the demand for gas and a decrease in oil, which led to a decline in oil stocks and an increase in gas stocks.
Although there are many reasons for stocks to rise and fall on their own, sometimes general market trends will help push them in one direction or another.
bull market
A bull market or bull market is defined as a 20% rise in stock prices after an extended period of decline. These gains are often attributed to widespread optimism about the economy. In general, when people think that things are going well, they tend to invest more money in the stock market since there is a higher chance of making a higher return.
Bear market
A bear market or bear market is a 20% drop in stock prices after a long period of high. This generally happens, due to economic events that may cause panic among investors such as trouble in trade, signs of recession that would hurt consumer spending, and layoffs that could affect many sectors of the economy.
When people have financial concerns, they tend to avoid the higher returns offered by investing in stocks in favor of investments with a guaranteed return such as bonds and annuities. The downside here is that there is a possibility that you may not make enough money to keep up with inflation in case the economy recovers, but you will be sure that your money is safe.
How to analyze stocks
An important part of understanding how the stock market works is knowing how to read and analyze stocks.
Each company has a trading symbol that is usually abbreviated as AAPL which stands for Apple Inc. And the first number you’ll usually notice on any major financial news outlet is the current share price. If you were looking at a stock chart, you might find the high and low prices of the last 52 weeks and the amount of earnings, up to the price of the last trade of the day and the net change which indicates the change between the current day’s closing price compared to the previous trading day’s closing price.
You can search for a company that is traded on the stock market in several ways:
Check major financial publications to see how the share price has changed over different time periods.
Track company filings with the Securities and Exchange Commission.
Search Morningstar or Bloomberg to find more information about the company.
Use a candlestick chart
There are many ways you can use existing data to gauge the performance of a particular stock. The standard line chart, for example, shows the ups and downs in a stock’s performance, and the candlestick chart goes into more detail and provides you with actual buying and selling patterns over a period of time.
A single candle represents a day in the market, and each candle or box contains four prices for a particular day: the open, the close, the high and the low.
If you are looking at the candle or the box itself, the upper and lower extremities represent how much the stock has moved between where it opened and where it closed. You may see the upward movement represented as a green box, while the red box may indicate the downward movement. For the outside of the box, the vertical line equals the high and low prices for a given day.
While a candlestick chart shows you the patterns and how the stock is moving and performing, it does not tell you the reason behind those movements.
Day traders will use the movement of these charts so they can pick which stocks to buy and then sell on the same day before it drops again. But the general problem with such an investment strategy is that it is difficult to get the market timing right.
It is important to note that although there have been many highs and lows, the average growth of the S&P 500, for example, is 7% after inflation. For this reason, many investors choose to take a long-term view of the stock market.
How do you invest in the stock market?
There are a plethora of ways you can invest in the stock market, and the right one for you depends on things like your time frame, target date, comfort level, and risk tolerance.
If you have more time to invest for example, and you have a high level of comfort with risk, your approach may lean towards the aggressive side. If you are older and have less time to invest, you might take a conservative approach.
Here are some types of investment accounts and the tools needed for it:

401(k): This is an employer-sponsored plan that is a defined contribution (meaning that the employer, the employee, or both contribute to it).
IRA: A tax-advantaged investment vehicle used by individuals to set aside some money as retirement savings. It also includes stocks, bonds, and mutual funds.
Buying Individual Stocks: You’ll need to understand industry trends, and stay up to date on the companies you’re buying stocks in. You can buy them through stock brokers, or online.

Mutual Funds: A mutual fund is an investment program that pools money from many investors to purchase assets. Mutual funds are professionally managed, and the majority invest in a diversified portfolio consisting of many types of assets such as stocks, bonds, and other securities.
Index Funds and ETFs: ETFs hold a basket of assets such as stocks, bonds, commodities, and currencies, and can be useful for a novice investor who is not sure what to buy.
Determine the budget
“Making money takes money.” This means having enough to cover your monthly expenses and bills, having some savings in case emergencies arise, and having all your debts paid off.
Next determine how much you can afford to invest in stocks. Ideally, a sound investment strategy means being able to invest continuously for a long period of time, even if that means starting small, getting the ball rolling now.
Diversification

The point of diversification is that it protects your investments from risk. There will be times when the stock market in general will do well, but rest assured that there will be bad times as well. True diversification is not just about having a bunch of different types of investments in different accounts, you have to have a good mix of asset classes like stocks, bonds, currencies, etc. Stocks are usually higher risk but have the potential for higher gains, and the opposite is true for bonds.
Diversification means having different types of investments that respond differently to events happening in the world, and that will perform differently according to market conditions as well.
Follow your interests
If you choose to go down the path of active investing, think about the companies and industries that interest you. As an active investor, you will need to stay abreast of what is happening in the world, market trends, and economic and political shifts that may affect the performance of your investments. Although there is no sure way to predict the future, you will make more informed decisions as you do more research and expand your knowledge.
If you prefer passive investing, you will most likely focus on investing in securities such as mutual funds and ETFs that can yield gains in the long run.
Now that you understand what the stock market is and how it works, hopefully that sense of confusion and dread has lessened. Remember that investing is a very personal matter, and if you are not sure whether a particular investment strategy is right for you, it is best to rely on an advisor of financial advisors who can provide you with the guidance you are looking for to get the most out of your investment.
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