Investing In The Stock Market

To the outsider, the stock market appears a bit strange and mysterious.  Traders scream at each other on the floor, fortunes are made and lost.  It all seems a bit confusing and mysterious for us mere mortals.  However, when you break it down, the reality of the stock market isn’t that hard to understand.  Let’s break it down into some basics.

First of all, what are stocks?  Simply put, stocks represent a fractional ownership of a company.  When a company decides to “go public,” they are basically selling you a small piece of the company in order to raise funds.  It is because of this that stocks are also called “equities.”  These differ from debt type investments such as bonds, where the company is simply borrowing money at a given interest rate rather than handing out pieces of the company.

photo credit: BlatantNews.com

These stocks are traded on an exchange.  Two major US stock exchanges or the New York Stock Exchange (NYSE) and the NASDAQ.  The NYSE is the one you see on TV with all the traders, the true “Wall Street.”  The NASDAQ is an electronic exchange.  However, they both have one thing in common, as they are the marketplace where stocks are bought and sold.  These transactions take place in large chunks, with different traders (in the NYSE) responsible for  buying and selling different stocks.  The actual process is beyond the scope of this article, and that’s OK since you will never deal directly with the process.

Instead, you will buy and sell stocks through a middle man known as a broker.  The broker passes your buy and sell orders to the market place, where they are executed.  A broker makes money by means of a small fee known as a commission.  You must buy and sell stocks through some sort of a broker, since individual investors cannot place stock market orders on the exchange.  A broker may also give investment advice, but this is not always the case.

So, that covers some stock market basics.  The tells you nothing about actually investing in the stock market, but that’s for another article (which I have many of on this site).  However, knowing some of the basics of what is actually going on in the market is certainly useful before you start investing in earnest.