The stock market is where investors buy and sell their investments through stocks, which are basically the shares of ownership in a public company.
What is the stock market?
The term “stock market” often refers to one of the major stock market indexes, such as the S&P 500 and the Dow Jones Industrial Average. Because it’s hard to track every single stock, these indexes include a section of the stock market and their performance is viewed as representative of the entire market.
I am sure you have seen headlines like “the stock market has moved lower”, or “the stock market closed up or down for the day”. Generally, this means stock market indexes have moved up or down i.e. the stocks within the index have either gained or lost value. Investors who buy and sell stocks hope to turn a profit through these movements in the stock prices.
How does the stock market work?
The concept is pretty simple. The stock markets operate much like an auction house. It enables buyers and sellers to negotiate prices and make trades of stocks.
The stock market works through a network of exchanges — you may have heard of the Nasdaq or the New York Stock Exchange. Companies list shares of their stocks on an exchange through a process called an initial public offering or IPO. Investors purchase these shares, which allows the company to raise money for business expansion. Investors can then trade these stocks among themselves, and the exchange tracks the supply and demand of each listed stock.
This helps to determine the price for each security or the levels at which investors and traders are willing to buy or sell. Computer algorithms generally do most of those calculations.
Buyers offer a “bid,” or the highest amount they’re willing to pay, which is usually lower than the amount sellers “ask” for in the exchange. This difference is called the bid-ask spread. For a trade to occur, a buyer needs to increase his price or a seller needs to decrease his.
These days, the stock market works electronically, through the online stockbrokers. Each trade happens on a stock-by-stock basis, but overall stock prices often move in tandem because of political events, news, economic reports and other factors.