How the Stock Market Works

How the Stock Market Works. We examine the inner workings of the Stock Market.

If you want to invest in stocks, you also need to have a basic understanding of how the stock market works. The stock market basically consists of two different functions - the primary market and the secondary market. In the primary market, companies raise funds for their operating expenses by selling shares in the company to investors. In the secondary market, investors buy and sell those shares to other investors depending on the current market conditions.

A stock market works like an auction. It is a very organized method of buying and selling, even though watching it on television would give you the impression that it is very disorganized as the people who work at a stock exchange do a lot of shouting and gesturing at one another. However, the buying and selling on the stock market starts in many different places. If you decide to purchase stock in a particular company, you would contact a broker who in turn takes your money and contacts a floor broker at the stock exchange. This floor broker is usually an employee of the broker or the company you deal with.

At the stock exchange, this floor broker will go to the appropriate section to purchase the stock you want. When the deal is done a message is sent back to your broker and you have now become the owner of stock in a company. At a later date, you may decide to sell the stock (especially if the price per share has gone up). Then you will make a profit. For example if you purchased 100 shares at 20.00 per share and the price rose to 25.00 a share you are sitting on a profit of $500.00. This is possible in a matter or hours or days depending on the stock you choose to invest in.

Many people choose to invest in the stock market for the long term. Stocks sometimes drop in value and you can lose money as well. There are no guarantees when you are investing in the stock market and you have to be prepared to take a loss as well as a gain.