The stock market is where investors buy and sell investments. So, what is it, exactly? Read this beginner’s guide to how the stock market works.
The stock market. You hear that term thrown around a lot, but what does it actually refer to?
It sometimes feels embarrassing to admit we don’t know about the financial world, but the truth is lots of people wonder how the stock market works.
So, if that includes you, just know you aren’t alone!
And in this post, I go over the basic of the stock market so you can have a general sense of one of the most important elements of the economy.
Sound interesting? If so, keep reading for more information!
What Is the Stock Market?
Well, here’s the first weird thing: It’s not actually one market. So that name is a bit misleading.
The stock market refers to a bunch of markets where people are able to buy and sell stocks.
So next we need to define what a stock is. A stock is basically a small portion of a company. So if you own a share of stock of, say, AT&T, then you actually only a tiny bit of the AT&T. Congratulations!
How do buy that share of stock? Well, that’s where a market comes in.
There are both virtual and physical markets where you can buy and sell different stocks. And buying and selling stocks is one of the best steps for long term financial independence!
Another common word for them is ‘exchanges.’ You may have heard of the New York Stock Exchange, which, along with the Nasdaq, is the most famous stock exchange in the world. And there are 14 others worldwide.
Indexes
In terms of stock market news, you may have heard people refer to the stock market as being up or down. Now, in a general sense, that means that the total of all stocks has gone up or down in value.
But since there are so many different types of stocks and so many variables for why they would be up or down, we use something called ‘indexes’ to be our symbols of how stocks are generally doing.
Indexes are a group of important stocks that, when taken together, represent how the overall stock market is doing. It’s like taking a sampling of some of the most relevant stocks instead of checking on how every single stock is doing.
The Dow Jones Industrial Average and the S&P 500 are the two most well-known indexes. They are a set collection of stocks that we use as a gauge of how well the overall stock market is doing.
Of course, if you don’t own stock in any of the companies in those indexes, then they don’t really have any bearing on your money totals. Only the actual value of the stocks you hold affect your financial picture.
But the indexes are a good indicator of how the overall market is doing at any given time.
How The Stock Market Works
At exchanges, people looking to buy and sell shares of stocks can do so using a ‘broker.’ A broker is a middleman who facilitates the purchase or sale.
They tell the broker how much they are looking to buy, and at what price. This is known as a ‘bid.’ Or if they are looking to sell, they tell the broker what their ‘offer’ price is.
Then, once buyers are matched with sellers by the exchange, the sale happens. And whatever the sale price was is the established value of the stock!
The Basics
These have been the bare essentials of how the stock market works, but hopefully, they give you a good baseline of information to get you started.
Be sure to keep researching the market so you can invest wisely and generate income!
If you have questions or want to learn more, check out some other blogs today!