Tuesday, July 20, 2010

The Beginners Guide To the Stock Market

The stock market or the the equity market as it is also known, is where public companies derive access to investors and capital that they need. Investors who buy shares in the company are really part owners of the company. As the company prospers and makes greater profits the shareholders also make more money.

The Stock Exchanges

The stock market is like a giant superstore, where people buy and sell stocks. The exchanges bring the buyers and sellers together.

In the U.S. the exchanges are the NASDAQ, the New York Stock Exchange (NYSE), all of the ECNs (electronic communication networks) and regional exchanges like the American Stock Exchange and the Pacific Stock Exchange.

Previously all trading was done in the traditional exchanges like the NYSE and the like, but now, almost all of the trading is done through the NASDAQ which uses ECNs and thousands of firms with access to the NASDAQ for trading.

Electronic buy-and-sell

This is how a stock market transactions are done today. The first thing you do is to open an account with, E*Trade by sending E*Trade say $1,000 check. E*Trade will then deposits the check into a trading account under your name.

You then log on to E*Trade and place an order to buy shares of stock in a Company. (The stock is currently trading at say $5.) E*Trade uses its networks to tell NASDAQ and all its related networks that there is a demand for shares of that Company..

NASDAQ will then find someone who is willing to sell the shares of Company selecte and instantly trades the stocks between you and the person who wants to sell the shares.

The information is sent to a clearinghouse where it is processed and the shares will now be registered in your name, that being done you now own the shares. The actual stock certificates are held "in street names" and do not need to change hands, although you can request that the certificates be transferred in your name if desired.

How stocks are valued

Stocks are valued in two ways. The first is created using some type of cash flow, fundamental earnings analysis or sales.

The most common way is the P/E ratio (Price to Earnings Ratio) of the company. This valuation method is based on historic ratios and statistics. The aim is to assign value to a stock based on a measurable attribute. The form usually drives long-term stock prices.

Supply and demand of the stock


The other valuation is how much the investors is willing to sell them for. Both of these values changes as investors change the way they analyze the stocks. The stocks are valued based on supply and demand.

If more people want to buy the stocks, the price will rise. Or the more people that want to sell the stocks, the price will fall.

Market forces The market is really driven by simple human emotions of greed and fear. In times of prosperity, the market usually rises above its real earnings.

In hard times, or political uncertainties and other negative factors, the stock market often performs worse than its underlying fundamentals. In the long term, the stock market is driven by several underlying economic, financial and global growth.

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