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How Does the Stock Market Work?

Updated on March 9, 2008

How Does The Stock Market Work?

Perhaps you've not been terribly interested in the stock market up until now? In some ways, it does seem disconnected from our daily lives - at least, it had been, until it started hitting the headlines with some frequency. Suddenly, it cast a spell over everyone's mood - if the Dow was up, the sun shone and even strangers greeted you with a smile. On the other hand, if the Dow plummeted several hundred points, it was usually cloudy, if not actually raining, and no-one had the time of day to speak to you.

While this may be an exaggeration, as well as an oversimplification, you might be wondering what it all means? Where is this stock market anyway, and is it like a farmers market - you can buy live”stock” at some of those, I understand? The first point to understand is that the stock market is not like one actual market, and is not in any one place. The term "stock market" refers to the overall system that allows the trading of stocks and shares for many companies. The business of buying and selling stocks and shares is mainly concentrated in stock exchanges, which are places where the market is made, by something akin to an auction, for particular stocks.

Stocks and shares for any particular company are generally only traded in one place, to avoid complications. For instance, many large American companies are traded on the New York Stock Exchange (NYSE), and only on the NYSE, which claims to be the largest auction marketplace in the world. America also has the second largest auction marketplace, in the American Stock Exchange (AMEX), which lists over 700 companies.

Auctions are held by people called specialists, whose responsibility is to maintain liquidity in the stocks they deal with, that is, enable the trading to take place continuously. It is a very regulated position, inevitably, to ensure that the trading public are served, but they do have to trade on their own account when necessary to respond to the demands to buy or sell a particular stock. Historically, the stock market as a whole has been slow to respond to technological innovation. That said, there is an increasing influence of technology in the marketplace, embraced at different times and to different extents by the various stock exchanges, and this is reducing the need for human involvement in making routine trades.

Did you realize that the advance of technology, as witnessed in the increasing efficiency of the stock market, is also helping the individual investor in establishing his own collection of stocks, or portfolio, and in assisting him to select and trade for his maximum benefit? Firstly, there are many online stock brokers, whose systems are designed for the informed investor to easily help himself to the deals that he wants. It used to be that a stock broker was a full service company, advising the investor what and when to buy. As a consequence, the fees to trade were large, to cover the work, and there was always the doubt - if the broker really knew the best shares to buy at any particular time, why was he still working there? The modern streamlined companies provide the dealing service, at very reasonable prices, but in many cases there is little assistance given, although there is often access to a wealth of data, if you know what to do with it.

This is where the internet again can come to the rescue. There are many stock and share selection programs and information available online. Some, like Insight Support Limited (www.insightsupport.com) give you a taste of their training for free, which is a good way to see if you feel that you want to pursue this as a means of generating more income, and to acquaint yourself with the particular company.

Of course, you will benefit greatly from engaging the support of a mentor, which is a natural progression from your first steps. You should look for a company that gives you individual mentoring, perhaps by video feedback. Using a professional to advise how best to select stocks is one of the best ways to learn. There are alternatives, but most of them include losing a lot of money to gather the information. The words of Mark Twain still ring true, even nearly a century since he died, "October is one of the peculiarly dangerous months to speculate in stocks. Others are July, January, April, September, November, May, March, June, December, August and February." His words were never more true than in the current investing climate.

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    • WizeTrade profile image

      WizeTrade 

      10 years ago

      I like your choice of words. Very funny yet it also gives valuable info.

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