Monday, April 18, 2011

Understanding the Stock Market

The daily results of trading on the Stock Market are everywhere. The numbers scroll across the bottom of the TV screen, fill the morning paper, and affect people’s mood. Because the results of trading on the stock market are so prevalent in the news, it is a good idea to form a fundamental understanding of the stock market. A familiarity with the market can allow you to better understand the role it plays in our complex society.

The stock market exists for the trading of shares, the fundamental elements of a company’s value. A share represents equity, or ownership, of a company. A company sells shares, or equity, to raise capital, usually to expand. A buyer, the investor, purchases shares or stock of a company to receive a share of the company’s profits and to share in its growth. Stock sales serve both parties admirably well, letting a corporation share its future profits with investors while raising interest free capital.

The Stock Market Itself
The stock market exists to facilitate and control sales of stock from publicly traded companies. A privately held corporation becomes publicly traded when it offers shares, representative of tiny pieces of equity, to the market in an Initial Public Offering or IPO. Once sold, these shares can then be traded at stock exchanges, such as the New York Stock Exchange or the NASDAQ. Publicly traded shares will change in value as investors buy and sell them, hoping to take advantage of gains in share value.

What Price?
The price of a stock on any given day is driven by price expectations in the near or distant future. Day traders and other short-term investors use the daily volatility of stock prices to profit, while long-term investors consider distant future share price projections based on company growth. These two types of investors, through supply and demand expressed in buying or selling, are the key factors in establishing a share’s value.

Daily Volume and Indexes
Trading on the stock market is vast. To help people better understand it, numbers are reported out each day in two forms: volume and value.

Volume, total number of shares traded, points to the overall vigor of business because it represents the interest level in trading. Strong activity means buyers consider profits likely. While this number indicates activity, it doesn’t reveal much about value.

Value is most often considered through indexes such as the Dow Jones Industrial Average and the S&P 500. These indexes consider the aggregate values of trades with losses offsetting gains to determine if shares trended up or down. Since the market is so large, indexes are based on selected inputs, most of which are carefully selected stocks representative of the industries traded in the market. Looking at this sample gives an idea of the change in value of the entire market. People are, of course, happiest when they hear the market value is up, but an index doesn’t necessarily mean a particular stock is up in value; an index is a reading of a particular cross section of the market.

Since most people don’t own stocks directly, market fluctuations aren’t critical daily data, but a basic understanding helps put all those numbers in perspective.

About the Guest Author
When he's not reading about the latest auto news, Miles Walker looks at auto insurance comparisons over at CarinsuranceComparison.Org. His latest article reviewed car insurance Texas.

1 comment:

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