The Ultimate Guide to How the Stock Market Works

Image of a market stock screenDid you know that over 50% of Americans have not invested any money in the stock market? More often than not, this is due to the fact that many people don’t understand how the stock market works.

Understanding how stocks work, market volatility, and investing in stocks can seem overwhelming at first. The good news is that we’ve created a guide that has all of the basic details you need to know. So, how do stocks work? Let’s explore everything you should keep in mind.

What Exactly Is a Stock?

In simple terms, a stock is a piece of ownership in a company. When you buy a stock, you become a partial owner of the company. For example, if you were to purchase one share of Facebook stock, you would own a tiny fraction of the company. There are two types of stocks: common and preferred.

Common stocks entitle the holder to vote on company matters, like the election of the board of directors. They also come with the potential to earn dividends, which are payments made by the company to shareholders. Preferred stocks don’t offer voting rights, but they generally have a higher dividend rate than common stocks.

Stock Trading

Now that we know what a stock is, let’s look at how stocks are traded. The stock market is where stocks are traded between buyers and sellers. It’s important to remember that you’re not actually buying the stock from the company, but from another investor who is selling their shares. The stock market is made up of exchanges, which are platforms that match buyers and sellers.

The most well-known exchange in the United States is the New York Stock Exchange (NYSE). When you want to buy a stock, you’ll need to place an order with a broker. A broker is someone who buys and sells stocks on your behalf. They will charge a commission for their services.

Once your order is placed, it will be matched with a seller on the exchange. The stock market is open from 9:30 a.m. to 4:00 p.m. EST, so orders can only be placed during those hours.

Stock Prices

Have you ever wondered why stock prices go up and down? It all has to do with supply and demand. The price of a stock is determined by how much people are willing to pay for it. If there are more buyers than sellers, the price will go up. If there are more sellers than buyers, the price will go down.

This market is a volatile place. Prices can go up and down very quickly, and they don’t always reflect the true value of a company. For example, a company might be doing very well, but if there’s more selling than buying, the stock price will go down. You can check out this resource to learn more about market volatility and how to navigate it.

Investing in Stocks

Buy and sell cardsNow that we know how stocks work, let’s look at why you should invest in them. There are two main reasons to invest in stocks: to make money and to build wealth. When you invest in stocks, you’re buying a piece of a company that will hopefully be worth more in the future. Do you need money? Read this:

If the company does well, the stock price will go up and you can sell your shares for a profit. So, investing in stocks is one of the best ways to build wealth over the long term.

Unlike savings accounts and bonds, stocks have the potential to earn a lot of money. If you invest in a company that does well, you could see your investment grow exponentially. Of course, investing in stocks comes with risks. The stock market can be volatile, and you could lose money if you invest in a company that doesn’t do well. However, if you’re investing for the long term, the ups and downs of the stock market shouldn’t bother you too much.

Over time, the market has a tendency to go up. You can always check the long-term trend of the stock before you invest. If the stock has continued to rise in value over the past decade, for example, then it is likely a safe long-term investment.

What Are the Type of Investments I Can Pursue?

There are many different types of investments you can pursue, but the two most common are stocks and bonds. Bonds are a type of loan. When you buy a bond, you’re lending money to the issuer. The issuer will then use that money to finance its operations. In exchange for your loan, the issuer will pay you interest.

At the end of the bond’s term, they will return your original investment. The two most common types of bonds are government bonds and corporate bonds. Government bonds are issued by the government, while corporate bonds are issued by companies. Both types of bonds offer a safe investment with a predictable return.

Understanding How the Stock Market Works Is Easier Than You Might Think

Although it can seem intimidating, learning how the stock market works can be one of the most valuable efforts that you make when it comes to growing your wealth. Be sure that you keep this guide in mind so that you can begin investing in the stock market safely and effectively.