What Is Stock Market & How Does It Function?

How does stock trading work?

The working technology of stock trading is straightforward. Suppose you want to buy some stocks of a company. So, you contact a broker who will pass your stock purchasing order to the market. Once both sellers and buyers get finalized, they negotiate the price. Thus, the stock trading completes.

The stock market acts through a network of stock exchanges. Since organizations list their shares on one such exchange to raise capital, investors purchase them.

Stock Market Participants – Investment banks/brokers, investors, traders

According to the Securities and Exchange Commission (US Regulator), a stock market includes various participants, like- brokers, investment banks, traders, and investors. Each stock market participant has separate functions and roles in keeping the market running smoothly.

• Investment bank

Investment bankers are market participants who represent organizations in several capacities. For instance, one private company wants to become a public one through an IPO. The investment banker represents such companies by looking after whether these organizations meet the regulatory requirements of the market.

• Broker

Brokers or stockbrokers are certified and licensed experts who buy and sell stocks on behalf of the investors. Since all investors do not bear the appropriate knowledge for trading securities, brokers act on their behalf. They study the market and buy or sell the shares on behalf of the investors. As they act as middlemen between the stock exchange and investors, you need to open an account with the broker to access the stock market.

• Investors

If a business has the potency to thrive and become a successful venture, an investor purchases a required amount of equity for an extended period. They put their money in the companies to help them grow, and both the investors and company owners will have some profit.

• Traders

Stock traders are the most vital participants of the stock market, as they buy and sell securities, either for themselves or for their investor clients. So, this clearly states that traders try to make profits by purchasing securities of a company or selling stocks.

Stock Market Indexes

A stock market index gathers data from several companies in a specific industry. These data help the investors understand the overall performance of the market. Below, we have penned down the most popular stock indexes in the USA.

• Dow Jones

This stock index is composed of 30 US companies that represent the whole stock market, and it is one of the most popular price-weighted indexes

• Nasdaq

This index is heavily weighted toward companies in the IT sector and is one of the most followed stock indexes in the world. It is based on capitalization weights.

• S&P 500

This is the most followed equity indices in the US. S&P500 tracks the performance of 500 large companies listed on stock exchanges in the US.

What is the Bull and Bear Market?

Bull and bear- these two different animals showcase the performance and condition of the stock market. Since bull and bear markets can influence your investment decisions, let us know what they represent.

• Bull market

The bull market occurs when the investment prices thrive sustainably for an extended period. Due to the growing economy and minimal unemployment rate, investors’ confidence grows. Therefore, they tend to purchase and hold onto shares to create a buyers’ market. For example, the US has seen the longest bull market from 2009 to 2019.

• Bear market

The bear market is the market for sellers and showcases the opposite picture of the bull market. If the security prices fall for an extended period, investors try to sell shares to make a profit in a declining economy.

The Great Depression is the optimal bear market example, fueled by high unemployment and a slow economy.

What is Short Selling?

Short selling offers investors a profit from a falling market. So, in the process of short selling, sellers trade securities that they do not own. But, the shares will get delivered to them. How?

Generally, brokers lend stocks to short sellers in short selling, and they sell the security. But, after a fixed period, they have to purchase the stocks back. Meanwhile, if the price of the share drops, short-sellers will make a profit from that.

Stock Market Type of Investment – Value Stock and Growth StocksGrowth and value stocks are the simple investment types in the stock market.

• Value stocks

Value stocks are companies that may not seem growing fast but have good fundamentals and hold a good future. Also, the new and unfamiliar organizations even fall which are undervalue category.

• Growth stocks

Growth stocks are companies that are heavily traded and have good fundamentals. Due to their heavy trading volumes, they are more volatile than value stocks and provide higher returns than value stocks. The only drawback is that they can have a higher downside than value stocks.