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US Stock Market - How the Stock Market Works

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  • US Stock Market - How the Stock Market Works

    Ever heard of the phrases "the stock market has crashed" or "the stock market is at an all time high"? But what exactly is the market and how does it work? In order to understand the basics of the stock market, one must initially understand the meaning of the word stock. Stock can simply be defined as the ownership in a company that results in future inflow of cash in terms of dividend and capital gains of the organization. A simple certificate provides a person with the part ownership of the company. However, the extent of rights that can be exercised over the ownership of the company depends on the type of stock that has been bought. The question that now arises is how does one get hold of the stock?

    This is where the securities market comes in. The market is a physical/virtual location where stocks of public limited companies are bought and sold on a daily basis. The brokers representing different companies are present within the market and trade shares of the companies on a continuous basis. The market provides a means to corporations to raise capital in form of equity whereby outflow of capital would grant shareholder certain rights over the assets of the organization. The most popular stock exchanges of the world include the London Stock Exchange of UK, the New York Stock Exchange and the NASDAQ. The forces of demand and supply are known to create havoc in the workings of the stock market and these market forces are responsible for stock market crashes and booms. The stock market is also subject to a great deal of speculation of investors and these results in prices of the stocks to experience severe fluctuations. The stock market is known as the secondary market whereby stocks of corporations are traded that have already been issued with no involvement of the corporation itself. The market might be a physical location or the transactions could take place in a virtual world.

    The stock market is therefore a medium that allows the buyers and sellers to interact on a daily basis so that they can buy and sell shares of large corporations. The buyers and sellers are generally interested in making capital gains from price fluctuations whereby stocks are usually bought when prices are low and sold later when prices increase. However, the market also caters to investors that are looking forward to making long term investments with the aim of benefiting from dividend and capital gains.

    The stock market is essentially run by brokers that charge a commission based fee depending on the service provided. The broker might be a full time broker or a discount broker and would charge a service fee depending on the work done. For example, a discount broker charges a lower fee than the full time broker because the discount broker is only involved in conducting share transactions whereas a full time broker is involved in conducting transactions of stocks along with providing sound financial advice.

    As you can see, the market is no different than a fruit market. It's a place you can go to exchange capital for an item. In this case your trading money for an actual business instead of fruit.

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