The Basics of Stock Markets and How They Work


Stocks are generally traded on stock exchanges which is where the convergence of buyers and sellers occurs. Stock exchanges can be physical locations and all transactions take place on the trading floor of the stock exchange. Traders can also work through virtual exchanges which occur through networked computers and through electronic trades.

Anyone who is looking to purchase shares of any company that is publicly traded, will in most cases require the assistance of a brokerage firm. It is possible to purchase and sell shares without brokerage firms although certain functional and legal challenges might arise. Stock brokers are registered and licensed and the securities and exchange sector is quite well regulated.

The stock market works on a systematic mechanism of the demand and supply system that determines the price of any stock. Stocks are sold or bought through an auction and stock brokers help by bringing buyers and sellers together. The highest bidder is allowed to purchase stocks that are up for sale.

A share of stock is basically a partial ownership in a publicly traded company. Buyers get to own a fraction of the company’s assets as well as its earnings mostly through an initial public offering (IPO). Companies offer share to the public because they need money to reinvest and expand the business. Only two avenues are available for companies to get such funds. This happens either through debt financing where the company borrows money, or through equity financing where the company sells stocks.

The stock market is generally the secondary market and this is where investors trade on stocks without any connection to the issuing company. When an individual wants to purchase stocks, they have to place an order with a brokerage firm. Brokerage firms have order departments and these departments then send the order to the floor of exchange. When a price is agreed upon for the shares, the order is executed and the brokerage firm confirms this with the buyer.

While many people know the prices of stocks, many are not aware how they can get involved in the stock market. An understanding of the health or the value of any company is essential if anyone wants to get involved investing in the stock market. It is also essential to undertake some research and learn how stock markets work. There are informative stock market books along with instructional information online for anyone who wants to learn.

When you own shares in a company, you are a shareholder. You are entitled to vote in the company and you can earn a percentage of the company’s profits. An increase in the demand for certain stocks will bring about an increase in the price of the stocks. Valuable stocks are usually less in supply. When a company makes critical investments and becomes successful, the prices of the company’s stock will increase. When companies perform poorly, the demand for their stocks will lower and the price of the stocks will go down.

Risks are involved in the sense that people speculate about future expectations in performance. Investors who feel that a company will have a better performance in the future will want to buy the company’s shares. Since it is practically impossible to forecast how business will happen and how a company will perform in the future, risks are involved and that is why investors have to understand what they are investing in.