The stock market – how does it work?
The stock market is a physical or virtual place where buyers and sellers can meet and exchange or trade company shares. If you buy a share, you become a partial owner of the company. If the company does well and makes money, then you make money too. The stock price will increase. If the company is not successful, the stock price will drop and you will lose money.
Investing in stocks is a very convenient way to become an entrepreneur. In exchange for your purchase price, you get a share of a company and its profits and dividends. You have a voting right that you can use at the shareholders’ meeting. The advantage for the company is to receive the money from the sale of shares. This is one of the best ways for a company to raise money for their business.
In the United States there are several different stock exchanges. The best known is the so-called “Wall Street” or New York Stock Exchange (NYSE). NYSE is a physical market. That means all orders to buy or sell shares go to one person who then matches these orders for an execution. These people are called specialists and each specialist is responsible for a specific action or undertaking.
The second best known stock exchange is the NASDAQ. The NASDAQ is a virtual market, that means that there are no specialists, only market makers and electronic communication networks. All orders are matched 100% electronically. The NASDAQ is the playground of so-called day traders who sometimes make hundreds of purchases and sales during the day. Because all executions are electronic and therefore extremely fast, it is possible to buy and sell shares in seconds.
It is this technology that has allowed the stock market to grow tremendously in recent years. Today, anyone with a simple computer and an Internet connection can trade stocks or other instruments such as futures or options online with low transaction costs. In earlier days, stock trading was the privilege of a few people just because it was so expensive. The stock market was in the hands of banks, investment funds, insurance companies, and wealthy private investors.
Today you still can’t buy or sell shares directly on the exchange, but you don’t want to 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 hassle out so he can trade stocks without having to think about how to properly execute his order. 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. Experienced traders who do not want or need these services and do their own research can use discount brokers who simply fill their orders for a lower fee.
You can make a lot of money in stocks when you have chosen to invest in the right company at the right time. Timing is very important and can make the difference between profit and loss. Keep in mind that stock prices always fluctuate because supply and demand determine the current price of the stock.