The stock market is a term that refers to the collection of markets and exchanges where activities such as buying, selling, and the issuance of shares of publicly-held companies take place regularly.
A stock market is a place where investors can connect so that they can buy and sell investments. The investments they buy are the most common stocks, and stocks are shares of ownership in a public company. This buying and selling is conducted through institutionalized formal exchanges or over-the-counter (OTC) marketplaces that operate under a defined set of regulations on the stock market to make sure that it is all fair and legal.
How Does the Stock Market Work?
The stock market operates much like an auction house and enables buyers and sellers to negotiate prices and to make trades.
Like most things these days, the stock market works electronically through the internet and online stockbrokers. Also, many people don't realize that each trade happens on a stock-by-stock basis, however when it comes to overall stock prices, they often move in tandem, and this is due to news, political events, and economic reports. Stock markets give investors a secure and regulated environment to trade as they operate under the defined rules, as stated by the regulator.
You might have heard of the New York Stock Exchange or the Nasdaq; these are exchanges in which the stock market works through. So basically, what happens is that companies can list shares of their stock on an exchange through a process which is called an initial public offering, or an IPO, then investors can buy those shares. This means that the company can raise money to grow the business. It essentially means that a company can divide itself into a number of shares and sells a part of those shares to the common public at a price. Investors are then able to buy and sell these stocks between themselves, and the exchange will track the supply and demand of each listed stock so that others know if a stock is high in demand or not, and this determines the price and also influences whether others want to invest or not.
If someone is interested in buying a stock, then they will offer a "bid," or will state the highest amount they are willing to pay. This amount is usually lower than the amount the sellers are "asking" for in exchange, so then there will be a negotiation where the buyer will need to increase their price or a seller will need to decrease theirs for a trade to occur.
The stock exchange is not only a secure and regulated environment, but it also shoulders the responsibility of making sure that there is price transparency, liquidity, price discovery, and fair dealings in trading activities. As mentioned, almost all major stock markets across the globe now operate electronically, which means that thanks to algorithms, the stock markets can perform price matching, which means that trades can happen at a price fair for both buyers and sellers.
The stock exchanges are also up to date on all company news, announcements, and financial reporting of the stocks on the market. So anyone looking to invest can go on the website for the stock market and find out about the companies that are listed.
How Do You Invest in the Stock Market?
Its best to speak to a professional to see if stocks are appropriate for you. Individual stocks and other securities can be bought through a brokerage account or an individual retirement account like an IRA. Both of these accounts can be opened with a financial advisor, and you'll be able to buy and sell investments.
Stock investing involves risk including loss of principal. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The opinions expressed in this material do not necessarily reflect the view of LPL Financial.