How Does the Stock Market Work

posted in: Stock Market | 0

How the Stock Market Works

The stock market allows buyers and sellers to negotiate prices on company stock, bonds, and exchange-trade products.Companies decide to list shares of stock (shares of ownership in a public company) on an exchange market during an initial public offering (IPO).

When investors buy stocks, the company raises money to expand their business. Once investors own this stock, they can make decisions to keep the stock, buy more stock, and sell the stock depending on price levels.Supply and demand for each security determine the price that computer algorithms calculate.

In the exchange process, investors buying a security offer a “bid”, the highest amount they are willing to buy at, that is often higher than the requested selling price, the “ask.” This gap is referred to as the bid-ask spread and a smaller bid-ask spread indicates that a security is liquid or easily traded.

Investors try to make money in the stock market through capital appreciation and dividends. Capital appreciation refers to selling the stock for more than it was bought. Buyers try to bid for the lowest price possible so they can sell for a profit later. Dividends are payments that companies give to their shareholders every quarter which can be reinvested or saved. Not all companies offer dividends on their securities.

Company news, earnings reports, political news, and the state of the national economy are factors that may impact the value of a security.

Getting Started Investing in Stocks

1. Inform Yourself on Current Market Trends with Eyes on the Big Picture

First, investors should find out what market looks like right now and whether it is a favorable time to buy stocks or protect profits. Read news sources that assess the state of the market and subscribe to magazines to stay up to date on the investing climate.

2. Find the Stocks with the Best Buying Potential and Outlook

Several market websites have lists of stocks to watch and stock ratings based on your potential buy range. Characteristics of a good stock include:

Quarterly earnings above 25%

Strong demand for a limited number of shares

Innovation in new products and management

A high rate of institutional sponsorship

Strong long-term earnings and growth

Earnings and Sales leaders within an Industry

3. Re-Evaluate Your Stocks and Plan Trades

The most effective way to maximize profits and minimize risk is to check the company’s sales, earnings, and industry trends and compare them against price and volume trends. New investors should set goals on when they would like to sell their stock and benchmarks for when they will sell their stock.

Other Considerations

New investors may find investing in exchange traded funds and then gradually investing in stocks a useful strategy. Getting experience and continuous education will help ensure a better investing strategy. Additionally, investors must remember to diversify their stocks in case a shock impacts an entire industry.

Leave a Reply

Your email address will not be published. Required fields are marked *