The stock exchange rules today’s economy.
People have made fortunes buying and selling stocks, but many have also lost them.
Investing in the stock market provides no absolute guarantees of prosperity, but it is considered to be a key component of a diversified financial portfolio.
The New York Stock Exchange
Nestled between the skyscrapers of downtown Manhattan sits the imposing New York Stock Exchange, home of the world’s most famous stock market. Rendering Wall Street synonymous with money, the New York Stock Exchange has been a gauge of the both the US and the world economy for over a century.
Every day, (billions) of dollars are transacted through the stock exchange, and millions of people nervously eye the market’s behavior on a daily basis.
Stock Market 101: What are Stocks and Shares
In order to make the stock market work to your benefit, you must know how the market works, and most importantly, when to buy stocks and get in the market and when to sell and get out.
The primary thing to understand about the stock market is what stocks and shares actually are.
When you buy shares in a company, you are essentially buying a stake in that company and becoming a partial owner, regardless of how small your share may be.
What is the Difference Between the Stock Market and the Stock Exchange?
In short, the stock market is a place where people buy and sell stocks. Technically, there are many “stock markets” which can be either physical or virtual. These markets are also known as “stock exchanges.” The best-known stock exchanges in the U.S. are the New York Stock Exchange and the Nasdaq, though there are 14 other exchanges that handle stock transactions.
When people refer to the “stock market,” they are typically referring to the exchanges as an aggregate. When they talk about the stock market going up or down, they are talking about how all of the stocks are doing.
Technically speaking, what people are referring to are the stock indexes such as the Dow Jones Industrial Average, the Nasdaq Composite, and the S&P 500. Indexes can be thought of as baskets of stocks that represent the market as a whole. People use these indexes to get a sense of overall market performance and stock market trends.
How to Buy Shares on the Stock Exchange
Anyone can then purchase shares of a publicly owned company – the ownership is shared amongst all of its shareholders.
Anyone looking to buy shares places an order through a stock broker. They place a bid that states how many shares they would like to buy and what they are willing to pay per share.
Stock owners who are looking to sell similarly place an order with an offer or ask price. When buyer and seller agree on number of shares and price, the exchange matches them and sets the price of the stock.
How does the stock market work?
So, how much money is the U.S. Stock Market actually worth? As of January 2018, the stock market was worth an estimated $30 Trillion. This is a rather staggering number, especially considering that the total amount of money in the U.S. totals $6 Trillion. Furthermore, this number factored in a whopping $6.6 Trillion increase in the 14 months since Donald Trump’s election.
Since that report, the stock market has seen a number of tumultuous days. So how does this add up? How do we make sense of the stock market?
Making sense of the stock market requires understanding global market capitalization. A company’s total capitalization is calculated by multiplying the total number of shares by the value of each share. So if a company had 1,000,000 shares at $50 each, the company’s total capitalization is $50,000,000. But if those shares drop to $40 each in one day, on paper the company lost $10 billion in capitalization in one day. But this is all on paper. The next day the stocks might climb up to $52, so in a two-day span, the total capitalization actually increased. But very little of this fluctuation accounted for actual trades.
What influences the behavior of the stock market
What the stock market trades is value, not cash. While there is a limited amount of cash, many things have value to people. The fact is, many factors influence stock prices and stock market behavior.
The fundamental factors that influence stock prices are:
- The level of the earnings base (represented by measures such as EPS, cash flow per share, dividends per share)
- The expected growth in the earnings base
- The discount rate, which is itself a function of inflation
- The perceived risk of the stock
However, there are other factors that influence stock price, including inflation, economic market and industry strength, demographics, trends, liquidity, and transactions not based on the intrinsic value of a stock.
Market sentiment also plays a large role in stock market behavior – in other words, the individual and collective psychological factors of market participants.