Stock Market For Beginners
The stock market is also known as the equity market where companies have access to capital and investors. Once investors had bought shares of the company, they look forward to potential gains of their investments in the future performance of the company.
With the exchanges as the main players, the stock market is like a big superstore, a buying and selling place where people buy stocks. These exchanges are where the buyers and sellers are matched.
The primary exchanges in the U.S. are the NASDAQ, the New York Stock Exchange (NYSE), all of the ECNs (electronic communication networks) and some regional exchanges like the American Stock Exchange and the Pacific Stock Exchange.
A few years back, all the trading was done in the traditional exchanges like the NYSE and the like. Now, almost all the trading is done through the NASDAQ which uses ECNs and thousands of other firms with access to the NASDAQ for trading.
Here is a sample on how a stock market transaction is done today. First, you open an account with say, E*Trade by sending E*Trade a $1,000 check. E*Trade then deposits the check into a trading account listed under your name.
You log on to E*Trade and place an order to buy 100 shares of stock in Company X. (The stock is currently trading at $5.) E*Trade uses its networks to tell NASDAQ and all its related networks that there is a demand for 100 shares of Company X.
NASDAQ finds someone who is willing to sell 100 shares of Company X and instantly facilitate the trading of stocks between you and the person selling the shares.
The data is sent to a clearinghouse where it is processed and the shares will now be registered to you. The actual stock certificates are held “in street names” and do not need to change hands, although you can request that the certificates be transferred to your name.
How Stocks get Valued
Stocks are valued two ways. One is created using some type of cash flow, sales or fundamental earnings analysis.
The most common is the P/E ratio (Price to Earnings Ratio). This valuation method is based on historic ratios and statistics. The aim is to assign value to a stock based on measurable attributes. The form is what usually drives long-term stock prices.
Supply and Demand
The other valuation follows how much the investors is willing to sell them. Both of these values changes as investors change the way they analyze stocks. In short, the stocks are valued based on supply and demand.
If more people want to buy them, the price goes higher. Conversely, the more people that want to sell the stocks, the lower the price.
In the short run, the market is driven by simple human emotions of greed and fear. In periods of prosperity, the market usually rises above its real earnings.
In tough times, political uncertainties and other negative factors, the stock market often performs worse than its underlying fundamentals. In the long run, however, the stock market is driven by several underlying economic, financial and global growth.
The Pros And Cons Of The Stock Market?
Understanding the nature of the stock market, including its pros and cons, doesn't have to be confusing one. Many people fear that in order for them to know the nature of the stock market, they have to understand a gamut of stock and marketing terms and all that jazz.
On the other hand, some people saw behind the veneer of all these economic gibberish, and saw the potentials of what they could get from investing in the stock market.
In a Nutshell
Simply put, the stock market is the market to buy and sell stocks and shares. This is where company stock gets traded. The term is also used to describe the totality of all stocks in one country. That is why we hear reporters talking that "the stock market was up today" or that "the stock market went down after the dollar fell to the euro."
What are the Pros and Cons of the Stock Market?
One of the reasons why we need the stock market is because it is an important factor for the US economic system to operate. Through the stock market, US companies improve their financial viability and expand their operations by raising funds from selling stocks. Without the stock market, our companies become slower in their growth and might falter in the increasing competition in the US as well as against international companies.
Another reason for the existence of the stock market is that it also has role in personal financial planning. This is because many individuals buy stock shares as part of their personal financial strategies. More importantly, most Americans have a stake in the stock market because retirement programs invest in stocks. It has shown that retirement programs earn a lot more by investing in common stocks than other options such as saving the funds in banks.
Of course, the stock market also has its downsides. Remember that the stock market is not a tool for instant success. True, there are cases of one getting wealthy by investing in the market, but this involves having shares in various company stocks, which means a lot of research, time, and money. One also gets rich when some stocks become "hotter" such as the "dot-com" bubble in the nineties, but when the initial buzz around these stocks falter, the value of these stocks tend to crash.