The stock market consists of many stock exchanges scattered around the world where traders and investors buy and sell shares of publicly traded companies. If you are in the US two major exchanges you probably heard of or seen on T.V would be New York Stock Exchange and Nasdaq. Shares change in price constantly in response to the law of supply and demand depending on who is buying and selling. What makes it interesting is some stocks or more volatile than others, it is wise to always do your due diligence before opening any positions.

A share of stock is a tiny ownership stake in a public corporation and the stock’s price primarily reflects the expectations of stock investors and market analysts on the company’s future earnings. These earnings are generally released every quarter and they give a summary what to expect from the company going forward (called guidance).

Traders who think a company will do well bid the price up, while those who believe it will do poorly bid the price down so it takes a buyer and a seller to move the market. Sellers try to get as much as possible for each share, hopefully making much more than what they paid for it. The original price the stock was purchased for is called the basis. Buyers try to get the lowest price in hopes the price rises in the future, whether they hold it long term or flip it short term is totally up to them.

Major stock exchanges in the U.S

Two of the world’s largest stock exchanges are located in the United States: the Nasdaq and New York Stock Exchange (NYSE). Combined, they are worth trillions of dollars in market capitalization, reflecting the value of all of the shares listed on the exchanges.

Each exchange matches buyers with sellers, but each have their own set of guidelines to go about exchanging shares.

• The Nasdaq is a dealer market so that means investors do not buy and sell directly to one another. Everything goes through Nasdaq so it acts like a dealer.
• The NYSE uses an auction method to set prices. Before the 9:30 a.m. Est opening bell on weekdays investors can enter their buy and sell orders for the day/week. The orders are matched up, with the highest bid price paired with the lowest asking price.

U.S. financial markets are very sophisticated which results in financial health disclosed by the companies is easy to obtain. Each of these company has their accounting department audited to ensure transparency of numbers and guidance issued.  This transparency increases the trust of investors from around the world which is why the U.S. stock market attracts more investors.

Stock Index Explained

The overall performance of the U.S. stock market is tracked over time by three principal indices: the Dow Jones Industrial Average, or DJIA (stock prices of the top 30 U.S. companies), the S&P 500 (stocks of 500 large-cap U.S. companies), and the Nasdaq. Many components and sectors of the markets are followed by their own indices. For example, the Russell 2000 reports on 2,000 small-cap companies and in order to join they must follow the Russell 2000 guidelines laid out.

Of course, other countries have their own stock exchanges and indices where the residing resident can invest in. The five major exchanges not located in the U.S are the London, Tokyo, Shanghai, Hong Kong, and Euronext exchanges. Each exchange is tracked by an index, while global indices track stock performance across borders. For example, the MSCI Index tracks the performance of stocks in emerging market countries such as China, India, and Brazil.

Why Should You Invest in The Stock Market?

The stock market is a factor that helps gauges the United States economy, every week there are reports released to give Americans an update on how the economy is trending. Investors who believe the economy is growing will invest in stocks because a strong economy helps companies increase their earnings as Americans are spending and companies are growing.

The stock market is an important way for companies to raise capital to expand or start their businesses so you can look at an investment in the stock market is an investment in economic growth. Newer companies use an initial public offering (IPO) to sell their shares in established exchanges like the NYSE or the Nasdaq and raise capital to grow. Investors who take shares in IPOs can potentially profit as new companies become public. Although it is very risky and stated again to do your due diligences before investing as many times if you do not get into IPO prices you are paying the premium price at retail.

A strong economy leads to an expansion phase of the business cycle and that is a great thing for your investments even your 401k. This is known as a bull market and it occurs when there is an increase of 20% or more across the broad market index for at least two months in a row.

Most of the stocks traded are common stocks, but some investors buy preferred stocks which are offered by some companies. They pay an agreed-upon dividend at regular intervals and they don’t have voting rights so you are paying premium to reduce the released trade effectively like perpetual bonds with a fixed yield and offer some downside protection so if you are more conservative this could be a good option.

Investors can make money in two ways—by trading and dividends when it comes to stocks. Investors who trade will buy and sell stock frequently, taking advantage of small ticks in price which can be effective but always remember the tax implications. Investors who buy and hold prefer to let their stocks appreciate in value over time. In many cases, the companies whose shares they buy reward them further with regular payments of dividends which can be a nice secondary stream of income.

Making Money in the Stock Market

There are two main ways you can make money with stocks the most common way, is through capital gains, which you make when you sell a stock for more than you paid for it. When stocks go up, investors who hold them could potentially profit by selling their shares and actualizing capital gains, or they could hold on to them longer in hopes that the prices will rise further and create more capital gains. The other principal way investors make money with stocks is through dividends. When a company issues a dividend, the shareholders get paid a percentage of it and is taxed at a lower rate so that is something to always keep in mind.

What is the Risk of the Stock Market?

The most significant downside is that you can lose your entire investment if the stock price falls to $0 unless you overleverage on Margin. If the company goes bankrupt, stock investors are paid last so for that reason stock investing can be risky. It is wise not to put all of your eggs in one basket and to diversify is a great tip.

If investors think the economy is slowing or stagnant, they may instead invest in bonds, which are generally considered a safer investment, although they do come with their own risks. Bonds give a fixed return over the life of the loan and typically do well during the contraction phase of the business cycle which means the interest is guaranteed.

When stock market prices decline less than 10% and this known as a stock market correction. When prices fall that much or more in one day, it’s known as a stock market crash. A crash can trigger a recession which can be a terrible time for the people as jobs becomes unstable and that spells trouble for those living pay check to pay check. The history of stock market crashes shows this is a regular occurrence so it is wise to always create a budget and have emergency money aside to live.

When prices fall 20% or more, it’s known as a bear market. A bear market lasts at least two months, although the average can be around 11 months and can reach lengths of as much as 20 months or more.

Other Types of Financial Markets

The stock market is just one type of financial market so before you invest, I will reiterate once again to ALWAYS DO YOUR DUE DILEGNECE before dipping your toes.
• Commodities are usually traded in futures options, which makes them more complicated. They include grains, oil, corn, wind, water, and even hogs. You can trade virtually anything and it is always wise to diversify to hedge your investments.

• Foreign exchange is where people buy and sell currencies. It’s very high risk because the values can change very quickly and dramatically as some countries’ currencies are not stable.
• Derivatives are very complicated securities that derive their value from the underlying asset, such as subprime mortgages. Individual investors should stay away. This is one of the riskier investments as your investment can disappear quickly if something goes wrong.