The Stock Market Isn’t A Mystery
In spite of having its own unique language, the stock market is not as mysterious as some investment professionals would have you believe. Understanding how the stock market functions does involve some research, but there are a couple of basic concepts that can help demystify the stock market. The first concept is to think about the stock market like a bank: The people who are making loans, however, are shareholders rather than loan officers. The more people buy of a single stock, the more money the company has to keep the company running. The second concept is that of supply and demand: The larger the number of shares, the lower the price of the shares. On the other side of that equation, the fewer the available shares, the higher the price. While this may seem like an overly simplistic view on a market that has a long-lasting impact on our personal fortunes, our economy and even our housing market, this is genuinely how the stock market works.
Investors also need to have other basic information about the stock exchange. This type of information includes understanding how investment bankers and stock brokers interact with the market, how to purchase stocks, information about commissions, and more. While this information is available from many sources, too often it is written in highly technical language that makes no sense to many investors. Here we have assembled some of the best resources that clearly explain how the stock market works, how it impacts our economy and information regarding how investment bankers and brokers work with the market and with investors.
The Dow Jones Industrial Average (DJIA) is composed of the stock of 30 American companies. Originally started in 1896, it is often referred to as "the Dow." This average is designed to reflect the average price of these companies. Learn here how the components of the Dow are selected and who makes the decisions.
Those who are of legal age can trade stocks on the stock market. What isn't always clear is how the process works. We'll walk you through the process to help you understand how stocks are bought and sold on the stock market. This will help you get a better picture of what happens to your investment dollars.
Located on Wall Street in Manhattan, the New York Stock Exchange (NYSE) is sometimes called simply Wall Street. Learn about when the NYSE opens, when it closes and what the typical annual holidays are associated with the NYSE.
The National Association of Securities Dealers Automated Quotations (NASDAQ) is the second largest stock exchange. The first day of official trading on the NASDAQ occurred on February 8, 1971. Today, the volume on the NASDAQ is the largest electronic trading platform in the world based on volume.
The criteria for measuring bonds and mutual funds is very different. While there are mutual funds that are entirely composed of bonds, many are a blend of stocks and bonds. Making sure that you understand how to evaluate these very different investment vehicles will have a long-lasting impact on your investment goals.
Oftentimes when hearing stock prices quoted you'll get two different prices. These prices are known as the bid price and the ask price. The bid price is the price that a buyer is willing to pay for a stock and the ask price is the price a seller is willing to sell. Typically these prices may vary as much as 1/2 of a percent.
Stocks come in various classes. Classes of stock have different voting rights based on how the company stock is laid out in the corporate documents. Stock class may also be used to determine how dividends are being paid to shareholders. Voting rights may also govern how frequently stocks pay dividends.
There are a lot of people who make it possible for investment firms to function properly. From receptionists to wire operators, each person in the organization helps provide vital services that help an investment firm function day-to-day. Investment firms may handle transactions from individual investors, from other firms or from independent brokers.
To the outside eye, stock exchanges seem to run themselves. This is simply not the correct view. Without investment bankers, brokers and dealers, individual investors may not be able to place trades. Brokers and dealers as well as investment bankers have special licensing requirements. It is important to know how they help the stock exchange work better for all investors.
Commissions are a big part of how brokers earn their money. Trades on the stock exchange carry fees imposed by the Securities and Exchange Commission (SEC) and brokers do have to get paid for the work they are doing. Brokers get paid in a number of ways, however, their income is primarily earned from the investor. Learn more about how investors pay fees to brokers.
Some investment firms offer accounts that include money management and investment advice. In many cases, these accounts carry a monthly maintenance fee. While investors need not accept money management as part of their brokerage accounts, it is important to consider the fees that they could incur should they elect to use these services.
Hearing the stock market news is often like watching a roller coaster in overdrive. Market fluctuations get highlighted on the front page of newspapers, get blasted over our favorite radio station and may even be running in ticker format across our favorite television shows. Before you allow yourself to get caught up in the hype, make sure you understand the stock market news reports.
Anyone who has ever invested in the stock market understands that stock prices fluctuate. However, when the entire market swings in one direction for an extended period of time, it may be called a bear market (when it goes down) or a bull market (when it goes up). Learn what the true differences are between the bear and bull markets.
Economic news including unemployment rates, consumer confidence and crisis overseas often have an impact on the economy. Rising or falling prices (sometimes tied to growing seasons) has an impact on the overall economy. How does this translate into stock market pricing? Before you begin investing, it's important to understand the impact that economic forces have on stock market pricing.
During the latest recession, a great deal of attention has been paid to the price of homes. As home prices have fallen, home sales have not been a good reflection of the overall housing market in large part because so many homeowners now find themselves with "underwater" mortgages. Learn how the stock market is impacted in the long and short run by home sales.
Today there are literally hundreds of millions of dollars invested in the stock market. With the advent an increase in self-managed pension funds, the potential for devastation is significant. However, not only personal pension funds are impacted by the stock market; pension funds for companies, unions and schools may also be impacted. Learn about the impact of the stock market on pension funds in this informative post.
While the stock market often fluctuates widely, market crashes are fortunately rare. We've had stock market crashes dating back hundreds of years with perhaps the most well-known crash occurring in 1929. Don't assume that because the market is tanking a few hundred points that another crash is on the way. However, do make sure that you understand the overall impact of stock market crashes.
Have a question about the stock market you can't find an answer to in our guide? If so, drop us a comment below and we'll be happy to find the answers you seek!
- Image credits:
• Stock Market Stress: Nutdanai Apikhomboonwaroot/FreeDigitalPhotos.net
• Reading financial news – Andy Newson/FreeDigitalPhotos.net
• Inner workings – jscreationzs/FreeDigitalPhotos.net
• Stock trends – Jeroen van Oostrom/FreeDigitalPhotos.net