What Is Stock Market And How Does It Work?
The term “stock market” is different from the share market, although they are approached through a single gateway. The key difference is between the terminologies. The market where one can buy or sell the shares of various companies is called as share market while the market where the securities can be traded including shares of companies, bonds, equities, mutual funds, ETFs etc. The share market is a part of the stock market and we can access them through our trading accounts.
The stock market is often represented by indices, like Dow Jones Industrial Average or the S&P 500. One cannot keep track of every single stock and hence these indices are used to watch the overall performance of the US market. The S&P 500 index keeps the record of the top 500 well recognised, profitable companies which give high returns. Now, one should keep in mind that if this index performs well one day, it doesn’t mean that all the companies represented by this index have performed well. Some companies might have underperformed due to backlash in a particular sector, say medication.
There are indices which represent a specific sector like agriculture, medication, banking, IT etc. These can be used to track the performance of companies belonging to a particular sector. If one wishes to look at the performance of the given company, there are a lot of options to find it online. One more important thing here is that you need to see the period or the time frame for which you are looking at the company’s performance. Suppose a company XYZ hit high for this week on Wednesday for positive response from the government in that particular sector, now switch to monthly time frame and you will see a completely different story. Maybe this week the company was underperforming or it might well be the other way.
The gain and loss in index’s performance is different than what the companies listed on that particular index might encounter.
Another crucial term associated is volatility, that is, movement of the market. If a market is too much volatile then it is not a good time to jump in a trade and the same goes for very low volatility. In both these cases the market becomes highly unpredictable.
How Does The Stock Market Works?
The working of the stock market is based on a common practice of buying and selling. Although the stock market works as an auction house where it enables the buyer and seller to negotiate the price. One thing must clear here and that is whenever you sell any security or suppose in this case 50 shares of a company then there must be someone willing to buy those shares at the price you have suggested. You can also go with the market price. It is not always necessary that only one person will buy all your shares, it could be 3 people buying 25, 20 and 5 shares.
The shares of various companies are listed at the stock exchange like New York Stock Exchange(NYSE) or Nasdaq. Once any order is placed from a trading account, the order is sent to the exchange where the number of stocks to be bought are made available(if any) from the participants willing to sell at the bid price. Once the stocks are bought, they are transferred to the demat account of the buyer. A demat account basically holds all the shares that we buy.
There are layers of security involved in this simple buying and selling process but we don’t need that right now. Usually the market opens at 9:30 am to 4:00 Eastern time. There is pre market trading hours where you can place your bid before the market opens. It is common to do this, as the orders get piled up till the market opens and once it does the orders get executed.
How Can You Participate?
If one wishes to trade then he/she needs to open a trading and demat account through a registered broker. It is important to note that there are various brokers available in the market with different charges for every action you perform from the trading platform. There are a lot of things one needs to keep in mind while selecting a broker like the brokerage and transaction fees, fast service by the broker if something goes wrong. You can invest in many stocks at once through index funds and exchange-traded funds. All you need is a trading platform.