The Stock Market & How it Works

The stock market allows people to buy ownership stakes in companies.

The stock market is a vehicle that allows people to buy small or large ownership stakes in publicly traded companies. It's a place for buyers and sellers to come together and exchange pieces of businesses for cash.

Types of Markets

The term "stock market" is often used generically, but in reality there are many different stock markets. Most countries have at least one stock market, and many countries have multiple ones. In the United States the biggest ones are the New York Stock Exchange and the American Stock Exchange, but there are a number of smaller regional ones as well.

Purpose

Though there are many stock exchanges, they all have the same purpose--allowing people to buy and sell stocks, which are simply ownership positions in publicly traded companies. Stocks of bigger companies, such as Microsoft or General Electric, can be purchased on national exchanges. Smaller companies are sometimes available only on regional stock exchanges.

Placing Orders

To buy or sell a stock, one must have a brokerage account, whether through a full-service broker or a discount online broker. Stock orders are placed through a broker, who then sends the order to the order department. It then goes to a clerk on the floor of the exchange, and from there to the floor trader. That trader then finds the specialist for the company being bought or sold to see whether there is a buyer or seller at that price. If so, the transaction occurs, and the trade is confirmed.

Much of this takes place in a split-second on a computer, particularly with bigger companies that have higher daily trading volumes. The brokers and traders take commissions on trades to earn their living.

Moving Prices

When buying a stock, investors can put in either market orders or limit orders. A market order is an order to buy the stock at whatever price it's trading. In that case the trade will be executed as long as there is a seller with the allotted number of shares.

Investors can also place what's known as a limit order. That means they will buy the stock only if it is at a certain price.

The price quoted on a stock is simply the last price at which it sold. If the stock is in demand, its price will rise. If not, it will fall to a point where a buyer is willing to take it.

Hours

Most stock markets are open between 9:30 a.m. and 4 p.m. Monday through Friday. They're closed on government holidays. Many markets allow after-hours and pre-market trading. Trade orders can be placed outside normal operating hours, but the trade won't actually be executed until regular business hours.

References

• Yahoo Finance: How Markets Work

Resources

• Amazon.com: "How The Stock Market Works"