A Guide to How the Stock Market Works

  • This guide will help you understand how the stock market works and the basics you need to know to be a successful investor.
  • The stock market is the heart of the economy. It's where people invest their money in companies to make money or gain more knowledge about a business.
  • Robinhood (HOOD) and Reddit have changed the way people are investing by making it easier.
Stock Market - A Guide to How the Stock Market Works

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A stock market is a place where people can buy and sell shares. It mostly consists of public companies listed on public stock exchanges. Government agencies regulate these exchanges to protect investors, maintain fair trading conditions and ensure that all transactions are executed fairly.

The stock market has existed for centuries. The first public company was the Dutch East India Company (VOC). The British East India Company followed in 1711.

The stock market is an important part of everyday life for people worldwide. It provides a unique way to invest your money and save it for future purposes. Educate yourself on how to diversify your portfolio, and you’ll reap great returns in the long run.

What Is the Stock Market?

A stock market is where investors can pour their capital into corporations that they think will perform well. You can do this by buying stocks or by investing in exchange-traded funds (ETFs). It is important here to note the distinction between shares and ETFs. Shares are a form of investment in a company. Investors invest in shares and the company gives them a share of the company. The value of shares depends on how well the company is doing.

In contrast, ETFs are a type of fund traded on the stock market. It is a security that tracks an index, commodity or other asset and provides investors with the opportunity to trade shares of that investment.

Now, let’s talk about the popular stock exchanges:

The New York Stock Exchange (NYSE) is the largest stock market in the world and it is located in New York City. Traders on the NYSE had an excellent year in 2021. The NYSE added $1 trillion in size and reinforced its position as the world’s largest stock exchange.

The Dow Jones Industrial Average (DJIA) is an index tracking the movements of 30 companies, each of which openly trades on public markets. It is considered a reliable gauge of the market because it tracks the performances of the biggest corporations. It has been used since 1896 as a proxy for the U.S. stock market’s performance and is seen as one of the most reliable indicators of market trends.

Meanwhile, Nasdaq is one of the largest stock markets in the world. Nasdaq offers both a trading platform for investors and an electronic communications network for brokers, traders, issuers and other market participants to trade securities without human intervention.

Does the Stock Market Matter?

The stock market is an economic indicator that can help you understand the economy’s overall health. If it starts rising, great! If it crashes and burns, be careful.

The stock market has been around for centuries and is still strong today. It may have been around for a long time, but it has also been subject to many ups and downs throughout history.

It measures how well companies are doing in terms of their share prices. This means that investors, mostly individuals, use this indicator to make decisions on whether or not they should buy or sell stocks to make a profit or loss.

The stock market has a huge impact on the economy. It affects how much people earn, what they spend their money on and what they buy. The stock market also helps in managing risk and making investments more secure.

The stock market is important because it allows investors to make money on the assets they already own and trade them for other assets they want to own. It also provides an opportunity for people to invest in companies they believe will succeed in the future while giving them a chance to profit from their investments if those companies do well.

Who Regulates the Stock Market?

The United States Securities and Exchange Commission (SEC) has regulated the securities market since 1934. It is responsible for regulating the exchange, broker-dealers, investment advisers and other entities in the U.S. The SEC’s mission is to protect investors and instill confidence in the capital markets.

The regulatory body enforces federal and state securities laws under its jurisdiction through civil enforcement actions or criminal prosecutions.

Here’s how the SEC is built: The U.S. President appoints five commissioners and the Senate is responsible for confirming the nominees. In terms of work, they’re divided into two divisions — one for enforcement and another for rulemaking.

The SEC has a variety of functions that it performs to ensure fair trading practices on stock markets, such as:

  • Creating rules on how companies can raise capital through initial public offerings.
  • Setting standards on how companies should conduct their business operations.
  • Creating rules to protect investors from fraud.

Trading

Stock traders are those who buy and sell shares of companies for profit. They are primarily looking for potential investments that will increase in value over time. Traders generally invest by buying a stock or an ETF, then holding it until it increases in value, or until they sell it at a profit.

Online brokers offer many services, such as research tools, trade execution services and account management tools for traders to use on their computers or mobile devices.

Reddit is also a place where people can share and discuss investment ideas in this digital era. There are subreddits, which are groups on Reddit, and chat rooms for every niche. You can use these communities to find like-minded people who will likely be investing in similar assets as you.

During the pandemic, many investors armed with knowledge from subreddits like r/wallstreetbets induced massive short squeezes by investing in embattled companies like GameStop (NYSE:GME) and AMC (NYSE:AMC). Much of the trading occurred on the Robinhood (NASDAQ:HOOD) platform, a place that allows you to trade stocks with zero commission. Younger investors are increasingly gravitating toward it for their investing needs.

Ultimately, there are many ways to trade stocks. Some traders use fundamentals, technical analysis and risk management, while others use chart patterns and indicators. The goal, though, remains the same through the centuries. Maximize returns and minimize risks through a process of continuous learning.

On the publication date, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience in analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio.


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