How Does the Stock Market Operate?

by Nicole Long

Few things in life seem as complex and intimidating as the stock market. News programs that feature the trading floor of the stock exchange and constantly run stock tickers along the screen can even make the stock market seem like an entirely different world. Fortunately, with a little basic knowledge, you can begin to unravel the mystery of the stock market.

Market Overview

Reviewing the basic organization of the stock market is a good starting point for discussing the operation of the stock market. The New York Stock Exchange (NYSE), commonly referred to as the “Big Board,” and NASDAQ are two of the most common stock exchanges. These exchanges help facilitate the trading of securities between buyers and sellers on the stock market. Founded in 1792, the NYSE is the largest stock exchange and represents the majority of large corporate stocks. NASDAQ, which merged with the American Stock Exchange (AMEX), includes technology stocks.

Basic Concepts

The stock market provides investors the opportunity to purchase shares of stock in companies of all sizes and from every industry. When you purchase a share of stock, you are buying into the company and essentially own a portion of that company. If the company makes money, you may earn dividends on your investment. Of course, you could also sell the stock for a profit if the value increases over time. On the other hand, the value of your stock can fall below the original purchase price, resulting in an investment loss.

Inner Workings

The stock market brings together buyers and sellers of stock with the help of brokerage firms. Investment advisers at brokerage firms initiate the trade by completing a market order. Market orders confirm the purchase of stock at the current asking price on the floor or the sale of stock at the current bid price on the floor. While the process may appear seamless to the customer thanks to the assistance of computer software, a lot is going on behind the scenes to make the trade happen.

Considerations

Pay attention to the various stock market indices when looking for data and statistics on overall market performance. While the Dow Jones Industrial Average is the most well-known stock index, the S&P 500 is most often used to track stock market performance. This is because approximately 80 percent of the overall value of all stocks in the U.S. is represented by the S&P 500.

About the Author

Nicole Long is a freelance writer based in Cincinnati, Ohio. With experience in management and customer service, business is a primary focus of her writing. Long also has education and experience in the fields of sports medicine, first aid and coaching. She earned her Bachelor of Arts degree in economics from the University of Cincinnati.

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