How Does the Stock Market Work

How Does the Stock Market Work

The stock market is a billion-dollar industry. There are many successful investors. However, if you are starting, understanding how stock trading operates can be challenging. You may also be among the many people confused between Stock, forex, and shares. This article provides valuable insights into how the stock market works.

According to Day trade the world, 90 percent of day traders lose their money. Some of the mistakes that lead novel traders to these losses are:

  • Executing market orders without understating demand and supply zones.
  • Selling too early.
  • Not understanding scarcity, volatility, and liquidity.
  • Using margin.

What is Stock Exchange

Before diving into what the stock exchange is, let’s define Stock. Stock is equity. It is the security representing the ownership of part of the issuing company. A unit of stocks is known as shares. Shares are the proportion of the company’s assets the holder owns, giving them rights to profits according to the amount.

The stock exchange owns no shares. It is a marketplace where buyers meet sellers. The process of exchanging can be physical or digital. However, digital exchanges are the norm. There are different stock exchange platforms. Nevertheless, New York Stock Exchange and NASDAQ are the leading stock exchange platforms.

It is worth noting that buying stocks on the exchange platform doesn’t mean buying from the issuing company. You buy shares from an owner willing to sell. When selling, you sell to another investor or buyer and not the company. Corporations or Companies only come in when issuing new shares or buying back shares from the stock exchange platform.

How do you Buy or Sell Stock

To buy Stock, you first need a stock broker. There are two types of brokers; full-service brokers and online brokers. Full-service brokers, as called, provide complete services. They usually have a physical location. However, with the growth of the internet, full-service brokers can be online brokers and vice-versa.

Full-service brokers consider personal information such as;

  •         Marital status,
  •         Age
  •         Lifestyle
  •         Income
  •         Risk tolerance

They use this information to create a long-term financial plan for the client. They provide trading assistance and advice on retirement, tax, and estate plans. The drawback with full-service brokers is fees. They charge higher prices compared to online brokers.

Online brokers offer a platform for interested parties to buy and sell Stock. You only need to open a trading account with the broker, a 15 minutes process. Web-based brokers have also developed bots and online assistance to clients, providing advice and assistance just as full-service providers.

There are no underlying charges with online brokers. They tend to be cheaper to manage and have many free services that benefit the client. Your online stock broker charges small fees for personal money management compared to full-service brokers. However, before committing to a broker, check your needs and read their about page. Also, check their compliance status.

How Stock Buying Happens

When you open an account with a stockbroker, they provide ways to fund the account. These include EFTs, bank transfers, or any preferred means available. After funding, you need to go online and ask the broker to place a trade for you. First, choose the Stock you need to buy. Typically, a company is represented by a 1 to a 4-letter ticker symbol. For example;

  •         Microsoft – MSFT
  •         Tesla Inc.  – TSLA
  •         Apple Inc. – AAPL

Selecting the ticker, prices for the company’s Stock will appear with costs for a single share. Also, you will see the last, bid and offer prices. The bid price is the highest price a person is willing to buy shares on the same platform.

The spread, the difference between the bid and ask prices, is crucial in stock trading. It indicates how liquid certain shares are. A narrow spread suggests an active or liquid market for the Stock. A wider spread means vice-versa. If satisfied with the price, place the order.

Orders in trading differ; market orders give an instant execution of the current market price. Limit orders occur when you set a specific price for buying. If the price reaches that point, an automatic buy is executed. If not, the trade remains active until canceled. However, some orders are set as Immediate or Cancel (IOC), meaning the trade has to hit the set price immediately or cancels.

A successful trade will give you a summary of your order with the broker. All active trades will be displayed on a single tab, and you have the power to cancel any of them.

Demand and Supply in the Stock Market

Like any other business, the stock market works on demand and supply bases. When the demand for a particular share increases, the price increases; when the supply surpasses the demand, the price trends down.

The seller sets the asking price. The buyer may accept the price or quote a different price called the bid price. The bid price is the price the buyer is willing to pay for a share. For example, if Tesla shares (TSLA) sell at $871.27 on NASDAQ, a buyer may quote 869.20, and a seller chooses to take or pass the offer.

The secret to profiting from stock trading is buying low and selling high. Therefore, if you think of buying, ensure you have all the information about the shares you want to acquire. Volatility is not the only indicator to use since the higher volatility, the higher the chances of the price going in either direction.

Take Away

Stock trading is lucrative. However, 90 percent of day traders lose money due to the lack of proper knowledge or guidance. You need to understand every market detail and how you can best place orders. Choose a broker per your needs but always remember that trading is risky, and you can lose all your capital.

Also Read: Top 10 Richest Bollywood Actress 2022, Priyanka Chopra Top in the list

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