How Does the Stock Market Work?

By Jacquelyn Jeanty

The Facts

In simple terms, a stock market is made up of three components. · Companies for sale· Company shares· Share, or stock exchangesA company share is ownership of a portion of that company. With ownership can come profit, which is why investors buy shares in companies. Whenever the company makes a profit, its investors reap a certain percentage of that profit.

Features

The buying and selling of shares is handled by stockbrokers who make money by handling your stock transactions on the stock exchange. Currently there are three large stock exchanges in the U.S.:· New York Stock Exchange (NYSE)· National Association of Securities Dealers (NASDAQ)· American Stock Exchange (AMEX)There's also the option of online stock trading which is cheaper, but can be risky if you don't know what you're doing. Either way, you'll need an investment account in order to buy and sell stock shares.

Identification

In order for a company's shares to be traded on the stock market, a company must first become incorporated. Once incorporated, a company can place its shares up for public auction which is what the stock market is: a public auction on company stocks.Once you buy a company's shares, you become a shareholder. Besides reaping profits (or sharing losses), shareholders are also responsible for electing a company's board of directors. The board of directors then become the brain of the corporation, making all the important decisions regarding the company.

Function

Stock prices are determined by various market factors such as:· the strength of the economy· current trade trends· current trends in spending· company financial reports· company technical reports· third party reports on a company's statusThe current market value of a company also helps determine share price. This is called the capitalization value of the company, and is calculated by multiplying the number of outstanding shares by the current share price.

Size Factors

Companies that are too small to trade on the major stock exchange indexes are sold Over The Counter (OTC). Typically, these are riskier investments because these companies don't meet the regulation requirements of an exchange. Also, smaller and newly established companies are more likely to go under than their larger competitors, thus enhancing the risk factor.There is definitely money to be made in the stock market, however it's best to know what you're doing before making a large investment.