How does the stock market work?
For accurate answering the question how does the stock market work, it’s necessary to explain what is the stock market. When people hear words stock market, mostly they will imagine wall street and everything what belongs to it. But these things are only outside aspects of the stock market. Simply said, the stock market is a huge crowd of people willing to trade with stocks. In order to work, in the stock market there must be market participants willing to trade. Buyers stand for demand and sellers stand for supply. The price of any stock is created by relationship between supply and demand, by market participants willing to buy or sell at a certain price. If demand surpasses supply, price should rise. If supply surpasses demand, price should fall. This economic principle applies to every market. Buyers are buying because they assume that prices will rise. Sellers are selling because they suppose that prices will go down.
Before you start investing in the stock market it is a good idea to ask yourself, How does the stock market work? The answer to this question is simple. Companies go public by offering a specific number of shares in their company to the public through the stock exchange. Investors then can use the stock exchange to buy and sell stocks of companies that they are interested in. While this basic description of how the stock market works is adequate enough to understand what the stock market is, to get a better understanding of how it actually works it will be important to learn about some of the terms that are commonly used when discussing the stock exchange including stock prices and market capitalization. The first term that you may hear when you start learning about how the stock market works is stock prices. Stock prices are the price that a specific stock sells for.
We often hear about the stock market reaching new highs and lows every now and then. There are statements like the Dow Jones Industrial Average rising 2 percent on a particular day, with advances leading declines by a margin of…” The question arises: How does the stock market work? You need to understand certain basic terms about stock market before understanding how it works. What is stock? The meaning of ‘stock’ can be better explained through an example. Suppose you want to start a grocery business. You buy the premises, the groceries, employ some staff, advertise and start your business. Let us say that you have invested $ 400,000 in buying the premises, building the racks and other sundry items. You spend, say, $ 200,000 on procuring supplies. At the end of the year, your gross income is, say, $250,000. Your net profit is $ 250,000 (income)-$200,000(expenses on supplies) = $50,000.
There’s also the stock split. A stock price that’s too high is bad, m’kay? Fewer people can afford to buy $100 stock than to buy $50 stock, and a small percentage decline on a high priced stock looks worse than the same decline on a lower-priced one. (If you have two stocks–one priced at $100 and one at $20–a 5 percent decline on the expensive stock brings it down to $95 per share, but the same 5 percent decline on the less expensive share is only a dollar.) If a stock is outrageously expensive, the company has the option of doing a “stock split.” These will be listed as “3 for 2” or “10 for 1” splits. If your company does a 5 for 1 split and the stock currently trades at $500, every $500 share will become five $100 shares–same market capitalization, but spread out over more shares.
