If you're curious, here's a rundown of the basics of stock markets, stock exchanges, and stock indexes. Before we can get into stock markets, you need to understand stocks and how they work on a basic level. Here are a few basic concepts that can help new investors understand how the stock market works. Stocks, also known as equities or publicly traded companies, represent ownership interests in businesses that choose to have their shares available to public investors.
In other words, instead of being owned by an individual or a private group, some companies choose to " go public ," meaning that anyone can become a part owner by purchasing shares of the company's stock. So how does the stock market work? There are entire books explaining the stock market, but you don't need to get too deep into the weeds to get a good basic understanding of the stock market.
Stock markets facilitate the sale and purchase of these stocks between individual investors, institutional investors, and companies. The vast majority of stock trades take place between investors. That means, for example, that if you want to buy shares of Microsoft NASDAQ:MSFT and hit the "buy" button through your broker's website, you are buying shares that another investor has decided to sell -- not from Microsoft itself.
By purchasing shares of a stock, you become an investor in the underlying company. Stock prices on exchanges are governed by supply and demand, plain and simple. At any given time, there's a maximum price someone is willing to pay for a certain stock and a minimum price someone else is willing to sell shares of the stock for.
Think of stock market trading like an auction, with some investors bidding for the stocks that other investors are willing to sell. If there is a lot of demand for a stock, investors will buy shares quicker than sellers want to get rid of them, and the price will move higher. On the other hand, if more investors are selling a stock than buying, the market price will drop. Taking it a step further, it's important to consider how it's possible to always buy or sell a stock you own.
That's where market makers come in. A stock's price is governed by supply and demand. If a lot of people want to own part of a certain company, then that company's stock price rises. One extremely important concept when it comes to understanding the stock market is the idea of a market maker. Specifically, there aren't always buyers to match up with sellers of stocks, so how can brokers buy and sell stocks in your account instantaneously?
To make sure there's always a marketplace for stocks on an exchange and investors can choose to buy and sell shares immediately whenever they want to during market hours, individuals known as market makers act as intermediaries between buyers and sellers. Here's a rundown of what investors should know about the process:. The main reason for using the market maker system as opposed to simply letting investors buy and sell shares directly to one another is to be sure there is always a buyer to match with every seller and vice versa.
If you want to sell a stock, you don't need to wait until a buyer wants your exact number of shares -- a market maker will buy them right away. Investors must carry out the transactions of buying or selling stocks through a broker, which is simply an entity licensed to trade stocks on a stock exchange. A broker may be an actual person whom you tell what to buy and sell, or, more commonly, this can be an online broker -- say, TD Ameritrade or Fidelity -- that processes the entire transaction electronically.
When someone says "the market is up" or that a stock "beat the market," they are usually referring to a stock index. You've probably heard statements such as, "The market is up," or that a stock "beat the market. Indexes are a convenient way to discuss an approximation of what is happening in the market, but it's important to understand that the major stock indexes you see on TV and in the news do not fully represent the entire stock market.
There are three different terms here with similar and often misunderstood meanings. The number of publicly-traded companies in the U.
Numerous studies have shown that, over long periods of time, stocks generate investment returns that are superior to those from every other asset class. Stock returns arise from capital gains and dividends. A capital gain occurs when you sell a stock at a higher price than the price at which you purchased it. A dividend is the share of profit that a company distributes to its shareholders.
Dividends are an important component of stock returns. They have contributed nearly one-third of total equity return since , while capital gains have contributed two-thirds. Investors who want to swing for the fences with the stocks in their portfolios should have a higher tolerance for risk. These investors will be keen to generate most of their returns from capital gains rather than dividends. On the other hand, investors who are conservative and need the income from their portfolios may opt for stocks that have a long history of paying substantial dividends.
While stocks can be classified in a number of ways, two of the most common are by market capitalization and by sector. Market cap refers to the total market value of a company's outstanding shares and is calculated by multiplying these shares by the current market price of one share.
GICS is a four-tiered industry classification system that consists of 11 sectors and 24 industry groups. The 11 sectors are:. This sector classification makes it easy for investors to tailor their portfolios according to their risk tolerance and investment preference.
For example, conservative investors with income needs may weigh their portfolios toward sectors whose constituent stocks have better price stability and offer attractive dividends through so-called defensive sectors such as consumer staples, health care, and utilities.
Aggressive investors may prefer more volatile sectors such as information technology, financials, and energy. In addition to individual stocks, many investors are concerned with stock indices, which are also called indexes.
Indices represent aggregated prices of a number of different stocks, and the movement of an index is the net effect of the movements of each individual component.
Because of its weighting scheme and the fact that it only consists of 30 stocks when there are many thousands to choose from , it is not really a good indicator of how the stock market is doing. Investors can trade indices indirectly via futures markets, or via exchange-traded funds ETFs , which act just like stocks on stock exchanges. A market index is a popular measure of stock market performance.
Most market indices are market-cap weighted , which means that the weight of each index constituent is proportional to its market capitalization. Keep in mind, though, that a few of them are price-weighted , such as the DJIA. Stock exchanges have been around for more than two centuries. The venerable NYSE traces its roots back to when two dozen brokers met in Lower Manhattan and signed an agreement to trade securities on commission. In , New York stockbrokers operating under the agreement made some key changes and reorganized as the New York Stock and Exchange Board.
The NYSE and Nasdaq are the two largest exchanges in the world, based on the total market capitalization of all the companies listed on the exchange.
The number of U. The table below displays the 20 biggest exchanges globally, ranked by the total market capitalization of their listed companies. Source: World Federation of Exchanges. Accessed Oct. Visual Capitalist.
Securities and Exchange Commission. Emory Corporate Governance and Accountability Review. Accessed Feb. IPO Monitor. Mark Smith. Federal Reserve Bank of Philadelphia. Library of Congress.
World Bank. Forex Capital Markets Limited. Walter Werner and Steven T. World Federation of Exchanges. Stock Markets. Stock Trading. Career Advice. International Markets. Your Privacy Rights. To change or withdraw your consent choices for Investopedia. At any time, you can update your settings through the "EU Privacy" link at the bottom of any page. These choices will be signaled globally to our partners and will not affect browsing data. We and our partners process data to: Actively scan device characteristics for identification.
I Accept Show Purposes. Your Money. Personal Finance. Your Practice. Popular Courses. Investing Investing Essentials.
Table of Contents Expand. What Is a Stock? Types of Stock. Why Companies Issue Shares. What Is a Stock Exchange? These stocks, known as over-the-counter stocks, became the Nasdaq's first focus, and some investors still refer to the Nasdaq as an over-the-counter market. Find the best online brokerage for you. As technology has advanced, the Nasdaq has created automated trading systems that not only match up orders from buyers and sellers but also provide the summary data and reporting required of all stock exchanges.
Once the internet came into being, the Nasdaq became the first stock exchange with its own website, and it was the first to allow online trading. The Nasdaq has also embraced cloud computing, using cloud-based solutions to store required regulatory documentation and other data. In addition to stocks, Nasdaq-operated exchanges also enable investors to trade in bonds, commodities, exchange-traded funds, and other more sophisticated investments.
Trading begins when the opening bell rings at a. Eastern time. The regular session continues for six and a half hours and closes after the closing bell rings at 4 p. However, the Nasdaq also gives traders the chance to participate in special sessions before the regular session begins and after it ends.
Premarket trading hours run from 4 a. Eastern time each weekday. After-market hours start at 4 p. Eastern time Monday through Friday. The Nasdaq also closes early, at 1 p.
Eastern time, on the Friday after Thanksgiving, and on Christmas Eve if it falls on a weekday and if the regular Christmas holiday is observed on Dec. The Nasdaq Stock Market is the second-largest stock exchange in the world, and it plays a vital role in incorporating technology into the trading process.
The Nasdaq provides an alternative to the New York Stock Exchange for companies that want to list their stocks on a U. With a long history of innovation, the Nasdaq should continue to help investors for years to come. The New York Stock Exchange has two primary functions:. When money is this easy to come by, it's important to watch out for companies that are coming public but aren't good investment opportunities.
Congress finally passed a bipartisan infrastructure spending bill that investors expect will boost spending for Caterpillar's equipment. Intuit opened the door to more growth by adding mobile banking to its accounting software. The health insurance stock rode solid quarterly earnings to new record highs.
Merck shares fell sharply on news that a competing COVID pill from Pfizer is more effective, but employers reported a big increase in jobs growth last month, pushing the index higher. The telehealth leader's strong quarterly earnings helped it rebound from losses earlier this year. Hubspot got investors excited by announcing new fintech services for its CRM platform. Investors got excited by the cybersecurity stock's new product and partnership announcements.
0コメント