stock market stack of coins

How the Stock Market Works

The idea of the stock market is both beguiling and terrifying to someone with limited knowledge and experience of it. If you happen to mention the words “stock market” to anyone who has only heard of it on TV, you can expect impressions of greedy businessmen swimming in mountains of money or a once-wealthy investor going completely bankrupt after a dramatic market crash. 

Surely, in very unlikely and severe instances, the scenarios above are still arguably plausible. Nevertheless, such is not the case for many people who understand the fundamentals of how the stock market works. If you have such an understanding, you can automatically approach the activity in a controlled way. Doing so will allow you to safely and efficiently build your wealth and boost your financial status.

monitoring stock market

What the stock market is

Before gaining an understanding of what the stock market is, you should know that stocks (also known as shares) are principally representations of a company’s properties and profits. So if you purchase stocks, you are technically purchasing a portion of a company in relation to that company’s total available shares. For example, if you purchase a hundred shares of a company with one thousand shares, you now own ten percent of that company.

So by definition, the stock market is the companies and investors congregate to buy and sell shares–the same idea as your community market but with a different, less tangible product. The stocks are classified by location based on the country where a company is based. For example, Coca-cola is based in the United States and is, therefore, under the US stock market

How the stock market works

The stock market is much less like the supermarket where everything comes with a set price code. Think of it as more like a traditional community market where you can negotiate prices or an auction where bids and offers are made to set the prices of shares. 

Exchanges happen through various networks such as the most-notable New York Stock Exchange (NYSE). Companies put out their initial list of stock offerings, and investors buy their shares, which allows the companies to raise more money to grow their business. Investors can then exchange shares among themselves, and the network takes note of the supply and demand of each type of share, which determines how valuable they are. In principle, the more a stock is purchased, the higher its value.

In earlier times, this type of trade used to occur in actual physical markets. The official world’s first stock market, which traded real stocks, was in Amsterdam in the seventeenth century, with Dutch East India becoming the first company to release shares in it in 1602. But with the advent of technology and its rapid advances, it is now done virtually through the internet or stockbrokers online.

businessman investing in stock market

How to invest in the stock market

Now that you fundamentally know how the stock market works, you might become interested in giving it a go and becoming an investor. Below are the steps you need to undertake to start investing in the stock market:

Define your investment style

Before you even dip a toe into the stock exchange investment pool, do some introspection, and define your investment style. There are a couple of ways on how you can go about it, but generally, you can be either hands-on about it, or you can leave it up to someone else.

If you’re the do-it-yourself type and you want full control of your investments by personally picking out which shares to acquire, you will need a lot of reading and research to get things done confidently. You should also have a watchful eye and enough time on your hands to monitor your business.

If you don’t feel as confident and are more comfortable letting someone else manage your investments, you can look for such services from major brokerage firms for a fee. The trick here is to set clear goals that your fund manager can base your investments on.

Open an account

To be able to invest, you will need an investment or a brokerage account. An online brokerage account is fast, easy, and cost-effective enough to allow you to purchase stocks, funds, and other investments immediately. Merrill Lynch, E-Trade and Ameritrade are some of the best companies to open a brokerage account with.

If you have opted for the hands-off approach in investing, getting a Robo-advisor for a fee can help you realize your investment goals without doing much work. What a Robo-advisor does is build you a portfolio of investments based on your investment goals, which you can set at the start of opening your account. Some of the best Robo-advisors come from Ally Invest, Wealthfront, and Betterment.

Set a budget

After opening an account, the next thing to do is to set your budget as to how much you want to invest. Typically, you need somewhere between $200 to $1000 to start investing, although there is no limit if you have a substantial disposable income

Your starting budget, however, is different from how much you should be investing for profit. There are general rules about how much of your money should be put into the stock market to invest healthily. You shouldn’t invest too much that you are jeopardizing your financial future. Make sure the money that you put in the stock market can stay there for at least five to ten years without you having to withdraw it out of need. 

Begin investing

Once you have an account and have set a starting budget, you can build it up steadily over time. Make sure to read up on all the tips and tricks there are out there to make your money work hard for you and to keep you safe throughout all the movements.

Overall it is simple enough to understand how the stock market works. Once you get started, you will eventually get the hang of it as long as you keep a level head, don’t take unnecessary risks, and don’t stop learning.

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About The Author

Vanessa R.

Vanessa R.

Vanessa has been a freelance writer for eight years, providing content independently and through various online platforms. Having worn many hats—a former student journalist, a registered nurse, an aspiring mom-blogger, plus six years of pharmaceutical sales experience under her belt, she adopts a broad range of approaches to tackling different subjects in personal and professional development. In her spare time, she enjoys chasing her two rowdy boys around the house.