Simple Explanation of Stock Market

The floor of a stock exchange.

The stock market is a market place where shares of stocks are bought and sold. Trillions of dollars are trading on the stock market, but it does not require an gargantuan amount of wealth to begin investing.

Function

Securities are physically and electronically traded at major stock exchanges including the New York Stock Exchange, London Stock Exchange and Nasdaq. Stock brokers facilitate buy and sell orders on behalf of investors, and trading specialists or computers at the exchange carry out those trades. The number of shares traded in a single session is referred to as volume.

Types

When the stock market is on a bull run, stocks are projected to rise or are already becoming more expensive. This is most beneficial to investors already invested in the stock market because his investments are worth more. A bear market represents a period of declining stock prices, which gives investors an opportunity to enter the market at a lesser cost, according to Motley Fool.

Benefits

Investors holding shares of a company may receive dividend payouts in the form of cash or stock. Companies distribute dividends to investors to share in profits as a reward. Investors have an option to receive the cash or reinvest the dividends and buy more stock.

Considerations

The stock market may sell off when positive economic indicators, such as a rise in consumer spending, are reported. As Motley Fool explains, traders may interpret signs of economic expansion as a precursor to inflation, which can trigger interest rate hikes. Higher interest rates may slow economic growth, which hurts stocks.

Fun Fact

Earl Crawley began investing in the stock market while he was earning only $20,000 annually. He was consistent even though he was investing in extremely small increments. Eventually, Crawley learned how to make his money work for him, for instance by reinvesting dividends, and grew his wealth to more than $1 million in the stock market, according to MSN Money.

References

• Motley Fool: Fortunes Aren't Made in Bull Markets
• Motley Fool: Understanding Stock Market Gyrations
• MSN Money: Roadmap to Riches