NITTY-GRITTY OF THE STOCK MARKET

Whenever people think of the stock market, they often get goose bumps because of the horror stories they hear about this market such as losing everything in one trade. But how does the stock market really work? Is this the right investment to become rich or secure retirement?

The Stock Market and Stock

This is the market for issuing and trading shares of publicly held companies through exchanges or over-the-counter markets. Stock market is one of the most important elements of a free-market economy because it provides companies with access to capital in turn for giving investors a piece of ownership in the firm.

Share or stock pertains to a unit of ownership interest in a company. Buying and selling of shares are done through an initial public offering (IPO) where the shares’ price are determined based on the firm’s estimated value and the number of shares to be issued. While these shares continue to trade on an exchange, the firm raises money to expand its business.

There are two main types of stock: common and preferred.

• Common Stock - A stock which gives the right to vote at shareholders’ meetings and receive dividends.
• Preferred Stock - A stock which gives no voting rights, but higher claim on assets and earnings than common shares.

Buying Shares

Basically, the ultimate goal for purchasing shares is to generate money from the belief the perception for the company is good and its estimated value will escalate. Because the company’s perceived value changes from time to time, traders and investors keep on trading a firm’s stock following the IPO. Investors can either make or lose money depending on whether their speculations are in sync with the market. The market is a place where investors and traders buy and sell the stock, pushing the price up or pulling it down.

Predicting whether a stock will increase or decrease is another story. As shares in general has the tendency to climb over time, many investors prefer buying a basket of stocks and hold it for a long time, attempting to capitalize on long-term bias and not worry on the fluctuations in stock prices.

Companies can also pay a dividend to shareholders. Dividend refers to a portion of the firm’s profit. Aside from the dividend, the share price continues to fluctuate. Therefore, the losses and gains in the share price are not dependent on the dividend. Dividends can be large or small, or in some cases, nonexistent with many stocks. So investors looking for a regular income from their stock market investments tend to purchase high dividend paying stocks

Selling Shares

It is given that there is a buyer and a seller in each stock transaction. These market participants have the tendency to become more aggressive than fellow traders, gliding the price up or pulling it down.

When the stock’s price declines, sellers become more assertive because they want to sell at a lower price but the buyers are only willing to buy at a lower price. So the price will continue to drop until to the extent buyers become more forceful and amenable to purchase at higher prices, pushing it back up.

Different investors. Different agenda. Hence, traders sell stocks at different times. Some of them have scored a good profit, sell the shares in order to lock in profit and liquidate the cash. Others have purchase the share at a higher price, but is in a losing position, so they sell their stocks in order to lessen the losse.

Volume

The number of shares changing hands in a trading day is called volume. Major exchanges including the New York Stock Exchange and the Nasdaq issue millions of shares daily. Meaning, thousands of investors in a single stock can decide whether to buy or sell stocks at any given day. Investors chase a stock with huge daily volume because it indicates they can easily buy or sell the shares whenever they please.

In the event a stock’s volume is inadequate or no trader is actively trading a stock, it is still possible to dispose of a small amount of shares because exchanges require some traders to provide volume, which they call Market Makers. Market makers act as buyers and sellers of last resort in case there are no buyers or sellers. However, they need not to stop a stock from climbing or declining. So many investors and traders still prefer trading stocks with huge volumes and not depend on market makers, mostly electronic and automated nowadays.