How Does The Stock Market Work?

 

 

We often hear about the stock market reaching new highs and lows every now and then. You can find statements just like the Dow Jones Industrial Average rising 2 percent over a particular day, with advances leading declines by a margin of…”

 

The question arises: So how exactly does the stock market work?

 

You need to understand certain basic terms about currency markets before focusing on how it works.

 

What”s stock?

 

The meaning of “stock” may be better explained with an example. Suppose you need to start a grocery business. You purchase the premises, the groceries, employ some staff, advertise and commence your business. Let us say which you have invested $ 450,000 in buying the premises, building the racks and other sundry items. You may spend, say, $ 200,000 on procuring supplies. By the end of the year, your revenues is, say, $250,000. Your net gain is $ 250,000 (income)-$200,000(expenses on supplies) = $50,000.

 

By the end of the second year your gross earnings are $260,000 as well as your net profit increases to $ 60,000. Your expenses remain unchanged. Now you assess your net earnings will likely remain surrounding this figure your present level of investment in procurement of supplies.

 

You believe of expanding your company. You calculate the whole value of your investment that features your investment on premises, sundry expenses, supplies and staff.

 

Going by the present inputs, the whole value of your business is $ 400,000(premises) $200,000(groceries) $60,000 (profits)=$660,000. Because you are in the company of making money and your business is also making reasonable profits, you may price your company at say $1,000,000 when you invite shareholders within your business.

 

Suppose your invite 10 or 20 shareholders. Each shareholder must shell out $1,000,000 divided by 10 or 20 to be an equal partner in your business. When deciding the business matters, each shareholder may have one out of 10 or 20 votes and definately will own exactly the same ratio of the assets and profits.

 

Or, you may also like to keep half the shares to yourself then sell the remaining half shares to others. In cases like this, you will have greater say running a business decisions and obtain the half the ownership and profits as well.

 

You may divide the total value of your company in still larger variety of shares, say, 100, 1,000 as well as 10,000.

 

Stock or share, at its basic, is actually that simple. It represents ownership of the company”s assets and profits.

 

Stock Exchange

 

While earlier you were running a private business, but with the participation of public most importantly, your business has turned into a public company. Moreover, the shareholders is probably not interested in carrying on their partnership within your company and could like to sell off their shares to others.

 

Selling shares in cases like this may not be easy.

 

So to be able to facilitate the trading in shares of such big public companies, stock markets or stock exchanges were create. We have the samples of New York Stock Exchange (NYSE), NASDAQ and American Stock Exchange. They are the supermarkets for getting and selling shares.

 

There are 2 types of stock markets, one is the physical stock exchange and the other is virtual stock market.

 

Physical stock exchange

 

New York Stock Exchange-NYSE– is an example of an actual stock exchange. To be able to trade your shares, you need to open a merchant account with a stock broker or a brokerage firm. The NYSE is a wild kind of place in which the stock traders is seen trying to out-shout each other while gesticulating with their hands trying to purchase or sell the shares. These persons are classified as floor brokers. Your stockbroker actually contacts these floor brokers on the NYSE to purchase or sell your shares. Countless shares are purchased or sold daily.

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