The stock market, what is it? As common and impactful as the stock market, it is a mystery to most ordinary Americans, despite having a 401k.
The stock market is a complex system that facilitates the buying and selling of stocks, or shares, in publicly traded companies. The stock market allows investors to buy and sell their investments in an efficient and organized manner. This article will explain how the stock market works so you can appreciate why it’s important for anyone interested in investing.
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The role of brokers in the open market
A company’s shares are bought and sold on the open market by investors through brokers who act as intermediaries between buyers and sellers. A broker is a person who acts as an intermediary between buyers and sellers of securities such as stocks, bonds, futures contracts, options, mutual funds, etc., executing orders on behalf of clients to buy or sell these securities at prices set by the exchange where they are listed. Brokers earn commissions from their trading activities based on volume or fees charged per transaction.
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Stock market Investors: buying stocks or shares
When an investor buys a share in a company they become part-owners of that company, which means they have the right to vote at shareholders’ meetings However, this right comes with certain restrictions depending upon how many shares you own. The investors also receive dividends when profits are distributed amongst shareholders, usually quarterly. The distribution of dividends also depends upon individual circumstances. In fact, some companies may not pay out any dividends at all if management deems reinvestment more prudent for long-term growth purposes.
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Price fluctuations of a stock
The price of each security is determined by supply and demand forces within the overall economy. If there is high demand for a particular stock, then its price will rise. By contrast, if demand drops, then its price will fall accordingly due to fewer people wanting to buy the stock and vice versa. Changes in economic conditions can affect prices significantly over time too. Recessions tend to cause prices across most sectors to decline, whereas booms encourage higher valuations overall throughout market sectors as optimism increases around future prospects/profits potential etcetera…
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Stock exchange
In order for investors to access these stocks they must use what’s known as an exchange. In the information age, everything is mostly done electronically. Therefore, a stock exchange is an electronic marketplace where buyers meet sellers electronically to facilitate transactions between them efficiently. This occurs without having physical contact with one another as we would need with traditional brick-and-mortar trading floors. Of note, these trading floors still exist today although much less frequently than before in the last century. Exchanges provide liquidity via large numbers of participants actively engaging daily within these virtual environments. Liquidity is the ability of traders/investors to quickly convert assets into cash. Thus, this creates opportunities for both sides to benefit from regular hours of operation times specified prior to commencing operations each day…
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Types of stock exchanges
There are two principal types of stock exchanges. These are primary exchanges like New York Stock Exchange (NYSE), London Stock Exchange Group PLC (LSEG), and Tokyo Stock Exchange Ltd.(TSE) as well as NASDAQ among others. They often host initial public offerings or IPOs. The secondary markets trade already existing ones, i.e aftermarket trades take place there.
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Primary Exchanges:
A primary exchange is the first place where a stock is listed and traded. The biggest primary exchanges in the United States are the New York Stock Exchange (NYSE) and the Nasdaq. Companies must meet certain criteria to be listed on these exchanges. Such criteria are minimum market capitalization, number of shares outstanding, and other factors. Primary exchanges offer higher liquidity than secondary markets since they are more heavily regulated and have greater trading volume.
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Secondary Exchanges:
Secondary exchanges provide an alternative for companies that don’t meet the requirements for listing on a primary exchange or prefer not to list there due to cost considerations. These markets may include regional or international stock exchanges, over-the-counter bulletin boards (OTCBB), pink sheets, and other electronic communication networks (ECNs).
They typically have less stringent listing requirements but also tend to have lower liquidity than their counterparts on major stock exchanges.
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Great article for beginners, Keisha!
There are a number of secondary markets I would like to share here:
Electronic Communication Networks (ECNs): ECNs are electronic networks that match buy and sell orders for stocks, options, and other securities between market makers and institutional investors. They allow traders to access liquidity from different sources around the world, providing them with better prices than they could get in a single stock exchange.
Alternative Trading Systems (ATSs): ATSs are computer-based trading platforms used by brokers or dealers to execute trades without having to go through an exchange or broker-dealer network. These systems often offer faster execution times as well as lower costs compared to traditional exchanges due to their increased automation capabilities.
Dark pools are alternative trading venues where large orders can be placed anonymously without the risk of exposing the price movements of those orders on public exchanges before completion of the trade is complete. This allows institutions and high net worth individuals to purchase large amounts of shares at once without tipping off other traders who may try to take advantage of their order size by buying ahead of them or selling short after they have bought in bulk, thus resulting in better prices for both parties involved in a transaction
Very useful information, Johan.
I appreciate it! This article is the first of, hopefully, many others. I hope you and others will contribute full articles and share investing tools and other resources so the central theme of investing can be fully developed here.
Keisha,
I like the fact that you start with the basic concepts about the stock market. I can definitely contribute some full-length articles by continuing with basic concepts. I hope others will as well.