| How Does the Stock Market Work?

How Does the Stock Market Work?


A stock market is a market for trading company’s stock. There are stock exchanges all over the world and the most common in the U.S. are the New York Stock Exchange (NYSE) and the NASDAQ. You know you can make money with these stock markets, but how does it exactly work?

Then Company Goes Public

The NYSE has over 3,200 companies listed. A company has to go public in order to be listed on an exchange. Companies decide to go public in order to sell their stock on the stock exchange. They sell stock when they want to raise money for their company.

The Company Issues Stock

A company that is issuing stock for the first time issues IPOs or Initial Public Offerings. Companies may continue to issue stock throughout the life of their business. In order to issue stock, they work with an investment banker who sets everything up.

You’re Ready to Buy

When you buy stock in the stock market, you are usually buying stock from other investors, not IPOs. When you want to buy a stock, you ask your broker to place an order. They can place the order electronically or on the exchange floor.

The Price You Pay

A company may initially sell a stock for $10, but when you go to buy it from someone else, it might be $20. This is because of the market aspect of a stock market. The price of a stock goes up or down based on supply and demand. If there are more people willing to buy stock in a particular company than there is available stock to buy, the price goes up. If there is more stock available than people are willing to buy, the price goes down. This is simple supply and demand principles that function in any market from the stock market to your supermarket.

The Stock Market is Just a Lot of Buying and Selling

It is called a market because people continually buy and sell. Investors decide they want to buy a particular stock because they believe it will go up in the future. A company’s goal is to make a profit and look appealing to stockholders and investors. A growing company will bring in more potential investors which will drive up the price.

Summary of the Basic Stock Market Process

  1. Company issues stock.
  2. Investors buy stock and become shareholders.
  3. Shareholders sell to other investors.
  4. Investors continue to buy the stock.

And on and on. This is how it works in a very basic sense. Sometimes companies will buy back their stock and sometimes they will issue more. Now that you understand how it works, join in and start investing!

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