Easy Guide to Understanding the Stock Market
The stock market can be a worthwhile place to invest and make money, but it does carry financial risks. These risks can be minimized with careful attention to investing principles and a solid understanding of the market. Knowing how a stock exchange works and how investors make money in the market can lead to good investment choices that make a profit.
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Identification
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The stock market, and its stock exchanges, is where investors trade stocks. Stocks are a type of investment called a security and represent a form of ownership, measured in shares, in a company. Other types of securities are bonds, futures and mutual funds. An investor uses money to try to make more money by putting it into investments that will rise in price and grow. Some stock market investors trade in long-term investments, while others, called day traders, trade stocks rapidly day by day.
Stock Prices
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A stock does not have just one price. The ask price, also known as the offer price, is the price a seller is willing to accept in exchange for ownership of the security. The lowest ask price for the security, or the best price at which an interested buyer can purchase the security, is called the best ask. The price at which the buyer is willing to buy each stock share is called the bid. The difference between the bid and ask prices is called the bid-ask spread, usually shortened to "spread." The highest bid price for a stock is called the best bid.
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Locations
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Stock markets exist in many countries all over the world, with major exchanges in countries such as Japan, England and Germany. The biggest stock exchanges in the United States are the New York Stock Exchange, NYSE Amex Equities (Amex) and the Nasdaq. A stock market does not necessarily have to be a physical place. Many stock trades are executed using electronic methods like telephone and Internet communications. The Nasdaq, for example, has no central trading location and deals only in electronic trades.
Making a Profit
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When an investor buys stock, a positive return on her investment is not guaranteed. An investor in the stock market makes money on stock trades and dividends. For an investor to make money on a stock trade, she must buy it at a low price, then sell it for a higher price than her original stock trade. She also must pay commissions and other fees on the purchase and sale of the stock shares. A dividend is a portion of the company's profit that is distributed to company shareholders.
Market Types
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Trading on the stock market is done mainly in one of two markets: the primary market and the secondary market. In the primary market, a company sells stocks to investors to acquire extra money, known as capital, often to expand or make improvements to a business. The primary market can also be known as a new issue market. The secondary market is where stockbrokers and investors trade purchased stocks after the company has initially sold the stock.
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References
- Photo Credit new york stock exchange image by Gary from Fotolia.com
