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How Does the Stock Market Work?

Published by Kelly Clifford | January 17th 2010 | Views:

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Understanding the stock market can be pretty daunting for a beginner. But to understand how it works you must try and understand the mechanics behind the stock market. So how does the stock market work?

A stock market works on the basic principles of demand and supply. The key players are the buyers and sellers who determine stock prices through their trading behavior and the brokers who facilitate stock trades. Understanding how a stock market works is the first step to understanding how to invest in the stock market for financial gain.

What are Stocks?

A stock, also known by the terms share and equity, represents ownership in a company. When companies want to expand their business and require capital to do so, they often turn to putting up parts of the company for sale to the public and asking them to buy a "share" of the company. Thus all the people who hold shares in a company, collectively the shareholders, are part owners and receive a percentage of the company's earnings in the form of dividends. Therefore, stock is an investment tool for the shareholders and a financing tool for the company.

How Does the Stock Market Work Like an Auction House?

A stock market works like an auction house since stocks are sold to the highest bidder. Buyers place bids on stocks and sellers sell the stock around the current share price. The stock is sold to the highest bidder. The price of stock is determined by the fluctuatios is place where brokers facilitate orders from buyers and sellers.

Today stocks are also traded electronically, so the movements of the stock, while not visible physically, can still be tracked digitally. Many people find it easier to invest in and monitor their stock portfolio through the internet since it is updated in real time.

It is important to note here that although a company directly releases its first stock to the public through an IPO (Initial Public Offering), the stock traded on the stock exchange has no direct involvement of the company and is merely a transaction between the buyer and seller.

What are Stock Quotes?

If you open the newspaper to the financial pages or check out any of the numerous online finance websites, chances are that one of the first things you'll see is a table with many alpha-numerical values in columns and rows. This is a stock table. The stock table gives the following information: name of company, 3 letter ticker symbol of company, the highest and lowest price of that stock in the past week (or any other time frame), the dividend paid out, the stock's yield calculated as a percentage of dividends per year divided by dividends per share, the closing share price, and the net change in the dollar price of the share (whether positive or negative - where positive is denoted with a green up arrow and a negative with a downward red arrow)

How Does the Stock Market Work to Determine Stock Prices?

Prices are representative of demand and supply. High stock demand combined with low supply pushes prices up while a low demand combined with high supply makes prices go down.

Perhaps the most important question is how to determine whether the price of a particular stock will go up or down. Understanding how the stock market works will help you to determine the stock's price trends and place you in a better position to make your fortune on the stock market.
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