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What does the Stock Market do?

Updated on February 28, 2008

Understanding the Stock Market

The stock market seems to be in the news every day, yet many people do not understand what it really is or how it works. Indeed, why should you even care if there seems to be a problem with the markets? How does the value of stocks affect you, if you are not even sure what stocks are? It is true that the stock market, at first sight, seems to have little relevance to your daily life, as, if you think of them at all, stocks and shares conjure up images of business men reading the Financial Times, but there is increasing access and influence from the markets on every phase of our lives.

Firstly, let us consider what the stock market is, and what it is not. The term "stock market" is somewhat amorphous, but embraces the concept of a system that allows trading, or buying and selling, company stocks. Although the terms are often used interchangeably, a stock exchange is actually different, and is the means by which buyers and sellers are brought together to trade shares and securities. There are many stock exchanges in the world, and you have probably heard of the New York Stock Exchange (NYSE), NASDAQ, the London Stock Exchange (LSE) and others.

Stocks are simply financial shares in a company. After an initial issue of shares, which a company sells to raise capital for its operation, the company plays no further part in buying and selling the stocks, even though the company's actions can affect the market for its shares, and thus the value. Instead, the stocks are bought and sold between investment groups and individuals, and at a price that both buyer and seller agree to. It is the function of the stock exchange to facilitate the trading in shares and similar "financial instruments", as they are called.

The stock market embraces all the stock exchanges, as a whole, whereas the exchanges are limited to shares that are "listed" with them. For instance, if you wanted to buy shares in IBM, you would have to buy them through the NYSE, where they are listed. This keeps some order to the proceedings, as, if they could be listed on several stock exchanges, it would be difficult to make sure that they were always the same price at any time.

There have been many changes in the way that the markets work in recent years. The stock exchanges have been progressively embracing technology and developing computerised systems to help in setting the price that both buyer and seller agree to. Originally, the markets were set solely by individuals called specialists, whose duty was to run a continuous auction to match supply and demand and ensure that trading took place in a rational way. One by one, the stock exchanges have been adopting electronic networks to facilitate trading. The LSE launched their Stock Exchange Electronic Trading Service (SETS) in 1997, and the NYSE started NYSE Direct+ in 2000, which allowed for automatic order execution. In contrast, NASDAQ opened in 1971 without any trading floor, but with a large electronic billboard in New York's Times Square. NASDAQ does not use specialists, but "market makers", and each stock can be traded by several market makers at the same time, which tends to make the prices more volatile.

The reason that there has been increasing interest in the stock market in recent years is that the marketplace has opened up to the individual investor. While people may have held shares in the past, they were for the long term, and not often traded or even thought about. Of course, you have always been able to call your broker, and put in your order, but this kind of practice was mainly for those who were already investment minded. The Internet has made research into stocks and shares much easier, the computer has made analysis of stocks and shares available to everyone, and the Web has made dealing in shares both cheap and simple. No wonder that everyone now thinks they can use all this available information and make a fortune in the markets.

However, as Stu Whisson, of Insight Support Limited (http://www.insightsupport.com) puts it, "While the tools are available to everyone, the fundamental understanding of how to use them is in short supply".

If you are thinking of getting into the stock market, it may be because you have heard that the average annual increase in the stock market is 5% per year over the past century. This somewhat beats the current interest rate on a savings account. If you are looking to invest for a long time, the fact is that there has never been a thirty year period for the stock market when investors have not made money. That said, there have been many periods when the dramatic fluctuations in the marketplace have allowed investors to lose their shirts. When asked by an eager investor what the stock market would do, J. P. Morgan succinctly replied "It will fluctuate", and this summarizes both the danger and the opportunity of trading on the stock market.

This article was written and provided by Insight Support Limited. Insight Support Limited, provide online trader training, to new and established traders, wanting to learn how to develop, and profit as a trader. Please view our website, at the above URL, and don’t forget to view our other hubpages, or the course and company directors personal and business FaceBook pages at: http://www.profile.to/stuwhisson

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      Danny 

      4 years ago

      Thank you, very helpful

    • profile image

      Pnav 

      7 years ago

      Informative

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