Stock Market for Dummies

Stock market is very hot topic right now and to the high level it reflects our economy. Almost every day we hear in business news information about stock market going up or down. But what causes this action and how actually does the stock market work?

For proper 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 visualize people on the trading floor yelling at each other. But these things are only outside elements of the stock market. The stock market is a huge crowd of people willing to trade with stocks. And as for every market, there must be buyers and sellers. Buyers represent demand and sellers represent supply.

The price of any stock is determined by relationship between supply and demand, by market participants willing to buy or sell at a certain price. If demand exceeds supply, price should go up. If supply exceeds demand, regularly price goes down. This is famous principle from economy and it works in almost all markets.

From this results that for a deeper understanding of what makes the price of a stock change, it is important to know what affects supply and demand. There is a lot of factors that influence price movement and their impact is relative because only buyers and sellers know why they bought or sold any given stock. Between these factors belongs news about company, industry or the whole economy. If, for example, company announces that it has a new important contract, it's signal that probably profit of company will be higher and value of stock will be also higher. If, for example, a company puts out a news that business conditions are getting worse, price of shares will often drop in value. Next are fundamental factors like earnings of company, growth potential, increasing revenues and other factors that reflect performance of company, and generally there is countless amount of other components that influence behavior of market participants.

Shareholders are the owners of corporations. When you buy shares of a company, you purchase part ownership in that company. You are a shareholder even if you buy just one share in a company. This ownership gives you some rights, like the right to vote on the members of the Board of Directors or the right to participate in the company's annual meeting but one from the most important benefits of shareholders are dividends. Dividends are payments made by a corporation to its shareholders. When a corporation earns a profit, it decides what portion of profit will be reinvested and what portion will be paid to the shareholders as a dividend.

And why do companies go public? There is one main simple reason and that's money. When company offers their shares through the stock exchange via IPO, what stands for Initial Public Offering, company can obtain more capital by selling its shares. For a company's stock to be listed and traded on a particular exchange, it must meet some exchange's requirements of size, profit, employees and so on.

New York Stock Exchange (NYSE)

The New York Stock Exchange is the largest stock exchange in the world by dollar volume and the second largest by number of companies listed. It's situated on Wall Street in New York. In 1972, twenty-four men signed an agreement that started the NYSE. Today, more than 80 percent of American securities are traded on the NYSE and there are listed around 3000 U.S. and non-U.S. companies.

American Stock Exchange (AMEX)

On AMEX there are traded mostly small to mid-size stocks. The AMEX is known to have more liberal policies concerning company listing than NYSE and many stocks that were not good enough for NYSE were accepted on the AMEX.

The NASDAQ (National Association of Securities Dealers Automated Quotations system)

Nasdaq was the world's first electronic stock market. It is the largest electronic screen-based equity securities market in the United States. The NASDAQ is not a physical location, but a computerized system, that stores and displays stock price quotes. Brokers all over the country have direct access and can make trades over the phone and via computer. The NASDAQ lists more companies and on average trades more shares per day than any other U.S. stock exchange.

When you see a stock symbol and to recognize on what stock exchange is stock traded, you can use the following rule:

NYSE - 1 to 3 letter symbol

Nasdaq - 4 letter symbol

Amex - 2 to 3 letter symbol

For example Microsoft has symbol MSFT, it's four letter symbol, so it's traded on Nasdaq.

If you want to learn more about the stock market and how to profit from it, you can check out this Trading Guide.