The Stock Market – How Does It Work
The stock market is either a physical or virtual location where buyers and sellers can meet and exchange or trade company shares. If you buy a stock then you become a partial owner of the company. If the company is doing well and makes money, then you make money as well. The stock price will increase. If the company isn’t successful then the stock price will go down and you loose money.
Investing in stocks is a very convenient way to become an entrepreneur. In exchange to your purchase price you get a portion of a company and its profits and dividends. You have a voting right which you can use in the stockholder’s meeting. The advantage for the company is receiving the money from the stock sales. This is one of the best ways for a company to raise money for its business.
In the United States there are several different stock exchanges. The best known one is the so called “Wall Street” or New York Stock Exchange (NYSE). The NYSE is a physical marketplace. That means that all orders to buy or sell stocks are directed to a person who then matches these orders for an execution. These persons are called specialists and each specialist is responsible for a specific stock or company.
The second best known stock exchange is the NASDAQ. The NASDAQ is a virtual market place, that means there are no specialists but only market makers and electronic communication networks. All orders are matched 100% electronically. The NASDAQ is the playing field of the so called day traders who sometimes make hundreds of buys and sells during the day. Because all executions are electronic and therefore extremely quick, it’s possible to buy and sell stocks within seconds.
It’s this technology which has allowed the stock market to grow tremendously the last years. Today everyone with a simple computer and an Internet connection can trade stocks or other instruments like futures or options online with low transaction costs. In earlier days trading stocks was the privilege of a few people only because it was very expensive. The stock market was in the hands of banks, investment funds, insurance companies and wealthy private investors only.
Today you still can’t purchase or sell stocks directly at the exchange yourself but you won’t want to do it anyway. You always have to go through a registered broker who takes your orders and transmits them to the exchange for execution. The broker takes all the hassles away so that you can trade stocks without having to think how your order gets executed properly. Full service brokers offer a wide range of services. You can get investment advice, research data, news and quotes and personal assistance. This includes a higher transaction cost. Experience traders who don’t want or need these services and do their own research can use discount brokers who just execute your orders for a lower fee.
You can make much money with stocks when you have chosen to invest into the right company at the right moment. The timing is very important and can make the difference between profit and loss. Be aware that the stock prices are always in fluctuation because supply and demand determines the current stock quote.