When companies want to raise capital for operations, they may issue shares of stock in their company. Doing so allows investors and traders to buy these shares, which are traded in the stock market. Used interchangeably with the term “stock exchange,” two major exchanges lead the stock market in the United States: the NASDAQ and the New York Stock Exchange. Buyers and sellers use these two venues to purchase or sell shares of public companies.
Understanding How the Stock Market Works
The stock market is beneficial for investors and the companies that have shares trading. It allows each company to raise capital and use it to expand product lines, marketing or general operations. Investors benefit by having a way to grow their money, which is done by purchasing a stock and selling it at a higher price.
When an investor wants to purchase shares of a company in the stock market, they place a bid at a specific price. If another investor currently owns shares and wants to sell, they offer their shares at an asking price. The difference between the bid and ask is the spread. It can change quickly throughout the trading day, based on the number of buyers and sellers interested in trading their shares in a specific company. In its simplest form, the stock market acts as an auction place, matching prices with interested buyers and sellers.
How To Make Money in the Stock Market
If a person has saved money and wants to invest in a public company, such as Apple, Starbucks or Microsoft, they can purchase shares at the stock exchange where the shares are trading. After taking this action, they hope the stock’s value goes higher. If the price appreciates, they may decide to take profits, which are known as capital gains.
Getting Paid With Dividends
Money can also be made in the stock market by purchasing shares of a company offering dividends. These are payments given to shareholders who want a guaranteed income for holding shares. These investors typically plan on keeping shares for the long term and may buy more shares in the stock market if the value of the shares drops in price. Doing so would increase the dividend payment they receive and even the price entered, known as dollar cost averaging.
Dividends can be taken as a cash payment or reinvested, which gives an investor more shares and the ability to earn more in dividends during the following disbursement periods, which usually occur quarterly. Several investors make money in the stock market by investing in companies that pay dividends.
How Do People Purchase Shares?
To purchase shares in the stock market, a person can open an account at a broker offering the service. Funds are sent to the person’s account to buy or sell shares. The account value will increase or decrease based on the movement of the shares owned. Shares can also be acquired by purchasing a mutual fund.
Going this route lessens the risk of holding shares in a single company as the mutual fund will typically purchase shares from multiple companies and offer shares in their mutual fund at one price. Using a mutual fund is a fantastic way for beginners to get started in the stock market as it can lessen risk via diversification.
Regulations
To ensure the stock market is a safe place to purchase shares, it’s regulated. In the United States, the Securities Exchange Commission (SEC) oversees the stock market. Its job is to protect investors, maintain fair, orderly, efficient markets and facilitate capital formation. Companies listed on the stock market are monitored by the SEC. Each company must meet specific requirements, such as filing quarterly financial reports, to be listed at an exchange. Failure to follow regulations can result in suspension and other disciplinary actions.
How To Choose a Stock Market Investment
When a person wants to get involved with the stock market, they can do so as an investor or trader. An investor looks primarily at a company’s fundamentals to ensure they are strong. If a company has good fundamentals, its shares may have a higher chance to increase in value over the long term, allowing the investor’s money to grow.
Investors and Traders
Traders also use the stock market to make money. However, they differ from investors when choosing the stocks of the companies they buy and sell. Typically, traders will look at technical charts to determine where the stock price is going in the short term based on indicators, such as moving averages. After buying shares, they may hold them for short periods, ranging from minutes to days, until their price objective is met.
Stock Market Cycles
The terms “bull” and “bear” are often used when referring to the stock market. In a bull market, prices rise, and the economy is usually doing well. Bear markets indicate a downturn in stock prices and sluggish economies. Investing during a bear market can be dangerous as share prices for several companies can continue to drop. Strong demand for shares exists during a bull market, creating higher prices. In contrast, investors begin to sell their shares during a bear market to stop their funds’ value from dropping.
Stock Market Crash
A stock market crash can occur fast if many stocks lose value simultaneously. Two major stock market crashes occurred in the 1900s, resulting in a significant drop in the value of people’s portfolios. The first was in 1929, and the second in 1987. In the 1929 stock market crash, the Dow Jones Industrial Average lost 23 percent in two days. In the 1987 crash, the Dow Jones Industrial Average fell 22.6 percent in a single day.
Research Before Entering the Stock Market
When an individual is pursuing investing or trading in the stock market, conducting a fair amount of research is imperative. Doing so can help ensure that the value of shares increases after being purchased. If shares are bought in a fundamentally sound company, it should eventually be reflected in the stock price by creating higher prices.