Explaining How Stock Market Works

Understanding how stock market works is pretty straightforward, even for a newbie. As long as you have some background on how buying and selling work, you’ll get the grip.

In this article, we’ll walk you through the very basics of the stock market, and more. If you’ve been curious about how this hell of a market works, this is the answer. Read on!

What is “Share Market” and How it Works

The “share market” or “stock market” is basically where you can issue, buy, and sell stocks. These stocks then trade on a stock exchange (we’ll see how it works later) or over the counter.

But what’s the big deal? Isn’t it just another place where you can buy and sell goods? How does it bear more weight than, say, a flea market? This is how stock market works, right? No?

In order to understand the inner workings of the stock market, we got to understand first what stocks, shares, and equities are.

Stocks and Types of Stocks

If you’re a bit confused, “stocks,” “shares,” and “equities” basically refer to the same thing. There are only very little contextual differences. So, don’t wrench the hell out of your mind.

Stocks represent ownership in a company or corporation. If you hold a stock, you deserve a slice from a company’s assets and earnings. Pretty simple, right?

A stock has value, meaning you buy or sell it for a price. Along with the stock come the various rights you can have as a stockholder. You may get some voting power, dividend, or other options, depending on the types of stocks you’re holding.

Common stocks are, as the name suggests, the most common stock type. They usually grant voting powers to the holder, proportionate to the number of shares the investor holds.

On the other hand, if there’s a priority list among investors, common stockholders are at the bottom. That means, for example, they would receive payment last if the company goes belly up.

Preferred stocks, on the other hand, offer you a higher claim on the company’s dividend. Shareholders of this kind of stocks take priority over common stockholders.

Preferred stockholders do not have any voting rights in general. But the features and rights the stock gives usually depend on the issuer, or the company.

Now that that’s out of the way…

How Does Investing in Stocks Work?

Stock markets work because of investors. And of course, we know that investors are after the money they can get. Stocks, if the company is good enough, can offer high profits.

As an investor, you want to buy a stock that can appreciate in value. You don’t want to buy a stock that will go down in price from a company that doesn’t seem profitable.

The biggest stock market trading secrets are really not secrets at all. We’ve told you the first one, which is buy a good stock. The second is this: hold it until it reaches its true price.

The stock of the company may rise in the short-term, but it may also drop afterwards. It’s therefore important to know just how much you expect the stock to rise. The fair price, true value, or intrinsic value of the stock can come from analysis—fundamental analysis.

This, basically, is the buy-and-hold strategy. It’s the most common strategy in the stock market.

Now that’s investing. That’s a strategy for the longer term. But we assume you also want to know its shorter-term counterpart.

Trading Online: How does Buying and Selling Stocks Work?

“Trading” in general means short-term investing, meaning you open and close a position within a day, weeks, or months. These days, most buying and selling of stocks take place online, hence the rise of online trading.

And stock trading has become a primary mechanism in how stock market works.

Buying is pretty much the same: you buy a stock that you think will appreciate in the future. Selling means you think the stock’s price will slide. You gain profit by the differences in prices.

We don’t usually want a stock to continue going down. That’s now how stock market works. In most cases, we only want a stock to go down when we think it will appreciate in the longer-term.

When its price does diminish, we buy more of it and we wait till it goes up. Then we’ll get more value out of it.

A stock trade can happen with a stockbroker, who helps you with your transactions. Sometimes, this broker even gives advice. But you’re mostly on your own, which means more flexibility.

Summary

Overall, the question of how stock market works is also a question of how investors value stocks. Investors buy and sell stocks—trade stocks—in hopes of achieving profits through price increase.

Now, the stock market works only as much as the companies behind it works. If the company performs well, its stockholders will want to hold on to its stocks because of the benefits. If the company performs poorly, the stockholder will sell the stock and go in search of greener pastures.

If you are an investor, it is imperative that clear up your time horizon. If you intend to hold the stock, you are investing. But if you buy and sell stocks on a shorter-term basis, you are trading. Still, the stock market works by giving traders and investors the chance to gain from stock price movements.