What
Is the Stock Market and How Does It Work?
Definition:
What is the stock market?
The term “stock
market” often refers to one of the major stock market indexes, such as the
Dow Jones Industrial Average or the S&P 500. Because it’s hard to track
every single stock, these indexes include a section of the stock market and
their performance is viewed as representative of the entire market.
You might see a
news headline that says the stock market has moved lower, or that the stock
market closed up or down for the day. Most often, this means stock market
indexes have moved up or down, meaning the stocks within the index have either
gained or lost value as a whole. Investors who buy and sell
stocks hope to turn a profit through this movement in stock prices.
How does
the stock market work?
The concept
behind how the stock market works is pretty simple. Operating much like an
auction house, the stock market enables buyers and sellers to negotiate prices
and make trades.
The stock market works through a network of exchanges — you
may have heard of the New York Stock Exchange or the Nasdaq. Companies
list shares of their stock on an exchange through a process called an initial public
offering, or IPO. Investors purchase those shares, which allows the
company to raise money to grow its business. Investors can then buy and sell
these stocks among themselves, and the exchange tracks the supply and demand of
each listed stock.
That supply and
demand help determine the price for each security, or the levels at which stock
market participants — investors and traders — are willing to buy or sell.
Computer algorithms generally do most of those calculations.
Buyers offer a
“bid,” or the highest amount they’re willing to pay, which is usually lower
than the amount sellers “ask” for in exchange. This difference is called the
bid-ask spread. For a trade to occur, a buyer needs to increase his price or a
seller needs to decrease hers.
Learn more about how to invest in
stocks
Historically, stock trades likely took place in a physical
marketplace. These days, the stock market works electronically, through the
internet and online stockbrokers.
Each trade happens on a stock-by-stock basis, but overall stock prices often
move in tandem because of news, political events, economic reports and other factors.
How do you
invest in the stock market?
If you have a
401(k) through your workplace, you may already be invested in the stock market.
Mutual funds, which are often composed of stocks from many different
companies, are common in 401(k)s.
You
can purchase individual stocks through a brokerage account or an
individual retirement account like an IRA. Both accounts can be opened at
an online broker, through which you can buy and sell investments. The broker
acts as the middleman between you and the stock exchanges.
No brokerage account?
With any
investment, there are risks. But stocks carry more risk — and more
potential for reward — than some other securities. While the market’s history
of gains suggests that a diversified stock portfolio will increase in value
over time, stocks also experience sudden dips.
To build a
diversified portfolio without purchasing many individual stocks, you
can invest in a type of mutual fund called an index fund or an
exchange-traded fund. These funds aim to passively mirror the performance of an
index by holding all of the stocks or investments in that index. For
example, you can invest in both the DJIA and the S&P 500 — as well as other
market indexes — through index funds and ETFs.
Source www.nerdwallet.com
its good to see i am able to help people like you. thanks for visiting and stay tune with us for more amazing knowledge about Share Market, Commodity and Stock Market.
ReplyDelete