The Stock Market and How it Works

If investors think the economy is slowing or stagnant, they will invest in bonds, which are a safer investment. That’s because bonds give a fixed return over the life of the loan.

Stocks are a historically-proven way to make a financial profit, and rank well ahead of other securities in terms of performance returns. shares have grown so much that the stock represents a major portion of an investor’s portfolio, an investor may sell some or all of those shares to reduce that risk and create a more-balanced, or diversified, portfolio.

To outflank inflation. Inflation eats into income.

What Is the Stock Market and How Does It Work?

So the price you see quoted for a stock may not be exactly the price you pay when you try to buy it. Stock market performance measurements depend on the time frame, as demonstrated in the earlier examples of Dow performance, but over the long run, it’s clear the stock market’s direction has been upward.

For more, see Dow Closing History. Individuals use the stock market because the returns, on average, outpace those of other investments, such as bonds or commodities.

In smaller markets, like OTC trading, a market maker helps to facilitate trades by buying shares offered for sale and then posting those shares for sale again. This is particularly useful when the spread between the bid and ask is wide and a stock is thinly traded, meaning there aren’t many buyers or sellers.

  • These days, the stock market works electronically, through the internet and online stockbrokers.
  • For the stock market to work there must be buyers and sellers.
  • Protective Life Insurance Company does not recommend or endorse any particular investment option, and does not provide investment advice.
  • The market maker gets to keep the difference between the bid and ask prices as compensation for providing a market.
  • A capital gain occurs when you sell a stock at a higher price than the price at which you purchased it

Where do you find investors?

A company that succeeds on those fronts stands a good chance of its stock price growing in value, while the company, in going public, makes use of the proceeds of the original stock sale to reach growth goals and manage operating expenses. The company can use the cash to invest in new markets, research new products, hire more workers and better advertise their products and services, among other things. is a property of Stock-Trak®, the leading provider of stock market contests and virtual market games. Copyright © 2019 Stock-Trak® All Rights Reserved.

Stock market investing is an excellent way to make sure your investments do better than inflation. Each exchange matches buyers with sellers, but they do it differently.

how does the stock market work

How the Stock Market Works

First off, there’s a lot of confusing jargon to get your head around. Plus, the stock market https://www can be volatile and has inevitable ups and downs. As you know, investing comes with a certain level of risk.

Many companies pay a dividend on their shares. When the company does well and decides to fund its dividend, investors are paid a dividend for each share, allowing investors to benefit from any growth in the value of the stock as well as earn a bit extra for their ownership.