How Stocks & the Stock Market Work

Understand the risks associated with the stock market.
i Jupiterimages/ Images

For some, the sounds associated with the stock market, such as the opening bell and screaming floor brokers, incite a passion hard to describe. Like a kid on Christmas, the stock market offers a cornucopia of potential and excitement, with profit representing the sought after gift of the season. For those with a less passionate view of the stock market, understanding the way stocks and the stock market work can at minimum stoke an interest in investing.

Stock Basics

Stocks represent an opportunity for investment in a specific company. Corporations use the sale of stock as a way to raise capital for company growth and expansion. While the potential for profit exists, risk also lies at the heart of any stock investment. With a stock purchase, one becomes an owner of the company. Of course, the amount of ownership rights one holds is relative to the amount of stock they purchased.

Two types of stock exist, preferred and common stock. With preferred stock, owners receive a fixed dividend rate and receive dividend payments first. Common stock holders can reap greater rewards with a variable dividend rate, however, they receive dividends after all preferred stock owners.

Market Matters

Stock exchanges, such as the New York Stock Exchange (NYSE) and the NASDAQ, provide companies and investors with a way to sell and purchase individual stocks. The stock market operates as a well-oiled machine with transactions occurring at a harried pace throughout the trading day. Financial representatives often called brokers process transactions from clients, both individual investors and corporations. These trades occur on the floor of the exchange at the time the purchase or sale is initiated by the floor broker.

Investor Influence

As investors purchase and sell stock, the value of the individual stock, and the market as a whole, fluctuates. For instance, a company announcement concerning better-than-expected earnings may spur investors to purchase additional stock in that company. As a result, the price of the stock increases as a reflection of the stock’s value. Overall, investors aim to purchase a stock when the value is relatively low and then sell when the stock’s value rises.

Additional Information

Understand some of the lingo associated with the stock market. For instance, a “bull market” refers to an increase in the investment in the stock market because of increased optimism. On the other hand, a “bear market” refers to a reduction in investment and growing negativity surrounding the stock market. Stocks most often work best as long-term investments. Before investing in stocks, pay attention to the stock market and do your research.

the nest