Can someone please explain the Stock Market and how it works to me in English?

Question

I do not understand what the Stock Market really is or how it works. I would really appreciate if someone could explain it to me in easy to understand terms. Thank You.

Answer 1

Companies sometimes need to raise large amounts of money to fund new research or product developments. One option is to take out a loan, but then they must deal with paying back the loan and interest payments.

Instead, many companies choose to sell portions of the company. Such a portion of the company is called a share in the ownership of the company, also known as a stock. Someone who purchases a portion of the company, a shareholder, is sometimes entitled to extra benefits: (1) the right to vote on members of the board of directors, usually one vote per share/stock; (2) sometimes shareholders get paid dividends of the company's profit proportional to the number of stocks they own (proportional to their ownership in the company).

People are motivated to purchase stock essentially because of two basic facts: (1) stocks can be resold; (2) stock prices vary. The ultimate goal is that you will end up selling your stocks at a price higher than what you paid for them, thus making money.

Why do stock prices change? The price of a stock is determined by the most amount of money someone on the floor of the New York Stock Exchange is willing to pay for it. If you want to know why they're willing to pay that money, you'd have to go ask them--but of course you are almost never physically at the NYSE.

I should note that the NYSE is not the only stock exchange. A stock exchange is nothing more than an organization that provides structure for the trading (buying and selling) of stocks. If you had to call up everyone in your neighborhood looking for someone to buy your Wal-Mart stock, it could be very difficult. The NYSE organizes buyers and sellers on a physical selling floor. Another stock exchange, the NASDAQ, is purely electronic and encompasses a vast network of computers and telecommunications workers.

If you invest on the stock market intelligently, you can expect to generally make money. But few people are capable of doing it intelligently. Most people, no matter what their IQs might be, are stupid or naive or gullible when it comes to stocks (as pessimistic as that may sound). They let their emotions get to them. They hear that company X is coming out with cool product Y and drop all their money on X's stock only to lose it all in a few months. They think that because their friend made money with such a strategy they will too. The fact is that an operation which may provide profit for a company does not necessarily translate into profit for shareholders.

Intelligent investing means investing your money dispassionately, rationally, calmly, without regard for which stocks are "hot," and with low expectations. Expect to make millions, and you will lose thousands. :D

One strategy is to wade through all the companies' financial records, analyze their financial trends, and hopefully find companies that are undervalued on the stock market. Remember that stock prices reflect how other investors think the company is going to do in the future. Investors aren't perfect; they make mistakes. The smartest ones sit back, wait for others to make mistakes, and then exploit that. This strategy is called "value investing." It takes time, patience, and huge amounts of care. It's as much a job as just running the companies you're investing in. But there are some people who are exceptionally good at it. The strategy was put forth by Benjamin Graham and is explained with wit and wisdom in his book "The Intelligent Investor." Warren Buffet is without a doubt the most successful implementer of this technique--but don't expect to obtain his success yourself. :D

Hope this helps.

Answer 2

A market is where buyers and sellers come together to trade. In the case of a stock market they trade stocks and shares (secondary market). There is also mechanisms for settlement (settling the money side and the stock side). Also facilities for raising capital for companies (primary market)

Answer 3

I suggest you to buy "Wall Street" on DVD.

Answer 4

Well, the stock market is a great place to invest your money in. This is how it works: 1) Let's say you bought 100 shares of a stock. The stock value is $14, so you pay $1400 2) The next day the vaule increased by $2 to $16, and you decided to sell it. If you have sold 14 shares you have earned a $1600, which is a $200 profit. In simple terms, the stock market is like a waiting game, where you buy cheap and sell expensive.

Answer 5

Hi,

Let's see if I can help you out with this.  I know that the stock market seems CRAZY sometimes.  I'll do my best to tear it down for you...

Basically, a stock market has a number of, what are called, exchanges that allow buyers of stock and sellers of stocks to actually, well, exchange their stock holdings.

Some of the biggest exchanges include the New York Stock Exchange, the NASDAQ exchange, and the London Stock Exchange (and there are many more around the world...)

At these exchanges, brokers and traders are licensed to place buy and sells orders with each other in order to swap their stock holdings.

When they place a buy order, a broker will place an order for, say, 100 shares at a certain price, say $10 per share.  This offering price is usually referred to as a "bid" price.

When there is a broker out there willing to buy, say, 100 shares, they may want to receive $10.10 for the shares.  This requested price is usually referred to as the "ask" price.

So, when there are buy orders whose "bid" price match the "ask" price of sell orders, then the trade is executed, the stock trades hands, and price of that stock gets updated.

When you see the price of a stock move up and down during the day, this is because there has been a new price at which some buyers and some sellers agreed to exchange their stock.

Now, as an individual investor, if you personally place a buy or sell order, you are usually doing so through a licensed broker (even if it's a simple order through a website where you never spoke directly with anyone...), so they execute your trade for you, and the whole process of working through the exchange, validating the transactions, keeping the stock certificates that are actually behind what you own, etc., is all transparent to you...

(thank goodness...)

The only thing you really need to worry about is what you want to buy and sell and how to work with your broker to make that happen.

So, one last thing would be what an index is, because they talk all the time about "the stock market is going down" -- but what they mean is that a major index of the market is going down.  So what is that?

An index is a weighted average of the prices of a number of different stocks that are considered to be representative of something.

For example, the Dow Jones Industrial Average is a weighted average of the price of 30 large industrial companies (such as AT&T, Coca-Cola, Microsoft, and Wal-Mart), which is considered to be a reflection of the overall U.S. economy.   There are other indices such as Transportation and Utilities.

So, when you hear that "the stock market is going down", that usually means that some or all of the major stock market indices are going down, which means the prices of the stocks that make up those indices are going down.

And the prices go down, based upon how the buyers and sellers at the stock exchanges are behaving at the moment.

Hope this helps, and good luck!

Answer 6

It is a casino

where you lose your money to the house