How Does The Stock Market Work

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A place where hundreds and thousands of investors come together and engage in buying and selling investments is the stock market. These investments are mostly in the form of common stock, which is a security representing ownership in a corporation or public company. 

Stock markets are easily accessible via brokerage accounts or a retirement plan. These markets are available for anyone. If you’re looking to invest and accumulate wealth for long periods, the stock market is the safest place for you, but it’s also very important that you have a thorough know-how of what the stock market is and how it operates. 

What Is The Stock Market?

The stock market indicates any stock market index, like the Wilshire 5000, BEL 20 or the DAX performance index. These indexes encapsulate different sections and categories of the stock market because it’s almost impossible to track every single stock. The performance of these sections is checked after set intervals and the results represent the whole market. 

When you hear people say the stock market has lowered down, upper locks, lower locks, or that the stock market closed up down, this means the stock market indexes are moving up and down. Put simply, when the stocks in an index gain or lose value, the movement occurs. People who invest in stocks earn a profit when this movement in stock prices occurs. 

The Working Of Stock Markets

Everyone hears about stock markets on a daily basis, and it’s a known fact that it is a platform to invest and earn, but most people do not understand the mechanism, hence they feel reluctant in getting into the business. The working of the stock market is quite simple. It is more like an auction place where the buyers and sellers are continuously negotiating prices and trading. 

The system operates via a plethora of exchanges. You’ll find hundreds of different exchanges. For instance, one of the most talked-about is the New York Stock Exchange. Corporations put the shares of their stock on these exchanges through IPO, initial public offering. Once the shares are listed, investors come in and purchase these shares, enabling the company to grow its business by increasing money. Later, these investors keep on buying and selling the stocks while the exchange keeps a record of all the details related to the listed stock. 

The supply and demand that is tracked by exchanges, help in deciding the market price for all securities. 

The market operates in the following way- buyers offer their highest bids to purchase a stock, while the sellers usually ask for more than the offered price to make the trade. This difference in the bid and asking price of the seller is more commonly known as “bid-ask spread”. The trade is made when the buyer and seller reach a common ground in their negotiations. 

All of this work is handled by computer software systems and algorithms. Prices are calculated and when you buy stock, you will have the bid and the bid-ask spread displayed on the portal. Although, this bid-ask spread isn’t much in a lot of cases and therefore people aren’t much concerned about this. 

The system of stock markets has seen major advancements in the past two decades. In past times, stock purchasing and selling were practised physically. Nowadays, the market works through the internet and the stockbrokers are operating online. The overall stock prices, these days, are mostly affected by external factors like news, government policies, political events, the condition of the economy, or any news-worthy factor. Good news will see the overall market prices shoot up and vice versa. 

Benefits Of Listing On Stock Exchange

Any company that starts operating at a big scale, wishes to get listed on a well-reputed stock exchange because of the amazing perks, which include:

  • By getting listed on an exchange, companies can use the option of liquidity at any time, for all shares owned by the company’s shareholders
  • Corporations are able to raise more money by issuing shares
  • More skilled employees are enticed towards the company when stock options are set up through publicly traded shares.
  • Investors are more attracted to listed companies because they have greater visibility. 

The Stock Markets Of Today

Before investing anywhere, you do a thorough analysis of that particular market and ensure that the risks in this business aren’t too huge. Similarly, investors do the same before entering in a stock market. They track the stock market’s performance by checking big indexes like Dow Jones Industrial Average or Nasdaq Composite. If you’re planning to do the same, you can log on to their official websites and look for the current performance charts. These charts will display the closing prices of the recent days and will also show you a detailed analysis, along with statistics, of how the market has performed over the years. 

The Concept Of Stock Market Volatility

There’s no doubt about the fact that investing comes with risk. The stock market is no different. There’s not much certainty, but if you apply the correct plan of action, the risks will be minimized and you won’t suffer losses in the long term. Experts and experienced investors have repeatedly suggested that you minimize your risk and chances of losses if you’re patient. Participating in day trading, when people instantly buy and sell stocks looking at the sudden price changes hold a lot of risks. On the other hand, if you invest and aim for long term profits, you’re most likely to accumulate a good amount of wealth. 

This can be better explained through an example. The Nasdaq composite and S&P 500 give an average annual return of 10% or more excluding inflation. If you invest there, and you aim to avail of this return, you will have to wait after investing. This is because the market does not get close to this percentage every year, some years it sees a sudden hike, while other times it could fall down, significantly. This is all due to market volatility. 

The stock market is very dynamic, therefore the key to reducing risks it to stay invested and remain patient in the ups and downs. If you’re frequently buying and selling stocks, you will definitely encounter loss at some point because it may be the wrong time. 

Brokerage Account

When you plan to invest in the stock market, you do it through a brokerage account. This is a financial account you open with any investment company. With brokerage accounts, you’re open to a rich profusion of investment opportunities like stocks, bonds, mutual funds, and more. The investment income in a brokerage account is taxed. The middle-man, broker, helps you open a brokerage account, which acts as an intermediary between you and the stock exchange. Brokers assist you in setting up an account and you do not even need huge sums of money to begin. In fact, many brokerage companies even allow you to open up without putting in any money, but you need to deposit some amount before making your first purchase. This depositing process isn’t too difficult either. You can do by shifting money from your bank saving account or other brokerage accounts if you own any. The best thing is that you have all the control over your money and investments done through brokerage accounts and you can sell or buy at any time you want. 

After you’ve decided which account you’re choosing- the retirement account or taxable brokerage, then you will need to find an account provider. Robo-advisors and online brokers are the two most prominent options that help investors do business. 

Investing In The Stock Market

Purchasing individual stocks has been made very convenient in the past years. You can do this via brokerage account or retirement account. Online brokers assist you in opening your account for stock purchasing and selling. 

The other option is mutual funds, which are investments pooling your money along with several other investors to procure shares of any securities. This is known as a portfolio. Mutual funds aren’t managed by online brokers, but by portfolio managers. 

As mentioned above, stocks come with great risk but even greater rewards as compare to any other securities. Experts in the field suggest that a big diversified stock portfolio has more chances of increased value. Although, you should also be prepared for sudden significant drops in the market. 

People often look to build a diversified portfolio, but are hesitant because they don’t wish to purchase a lot of individual stocks. For this, there are different mutual funds like an index fund or exchange-traded funds, and money market funds for short term securities. These mutual funds show you the performance of any particular index by tracking all the stocks and securities within the index. For instance, you can invest in multiple renowned indexed through exchange-traded funds. 

If you aim to invest in the long term, stock mutual funds are ideal for you. However, if you want your money to return within 5 years, the mutual fund or diversified portfolio will be unsuitable. Remember, with a short-term plan of earning money, you will never enjoy greater profit margins because you’ll keep rolling your money without waiting for the market to overcome the losses. 


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