---- Stock Market Basics ----
The stock market is about buying stocks, and either holding them for capital apprenciation (i.e. selling them at a higher price than you bought them for), or for dividends (money given out to shareholders by the company).
A stock is basically a part of a company. When you buy shares of stock, you become an owner of part of a company. Companies will sell stock so that they can gain capital to grow the company.
Usually, however, when you buy stock, you are buying stock from other shareholders who had in the past done the same as you are doing, or bought from the company. Companies only issue more stock into the market through Intial Public Offerings (IPO's) or Seasoned Offerings.
When you buy regular stock, since you become a part owner of the company, you will also gain voting rights to the company. Usually, this means you will be able to vote to elect a Board of Directors that will oversee the company's executives, etc. for the shareholders. However, you will usually need a lot of shares in order to have a sizeable say in the voting process.
As previously mentioned, people profit from either buying and selling stocks, or through dividends.
Some people will buy stocks at a low price, and will hope to sell them at a higher price in the future.
Others will buy stocks, and hold them, and recieve the dividends from the company. Companies will pay dividends to the owners (which would include you if you owned stock), if the company is profitable, since the owners will want to profit from their invested capital.
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The process of the Equity Market
1) Someone (customer) trading through a broker (online or not) places an order to the broker.
2) The broker passes on the order to a brokerage trader
3) The brokerage trader inputs bid / ask orders to fill the order
4) Once the shares are purchased / credited, they are placed in the customer’s brokerage account (electronic or physical certificates).
1 ) If you're someone who wants to trade in the equity market, you can open up an account with a brokerage (usually online), and from there, place buy, sell, short, cover, etc. orders, and trade in the market.
== How Prices Are Determined In the Equity Market ==
Prices are dictated by the forces of Fear and Greed, which manifest through supply and demand
In the actual market, prices are technically determined through bid and ask prices, the manifestations of supply and demand (non-respectively).
If a floor trader wants to buy (or cover) an issue, they will post a {bid} on the issue they are asking for, and the bid price is how much they are willing to pay for that (demand). Traders will try to bid as low as they can, because they want to buy as low as they can to maximize profit.
If a floor trader wants to sell (or short) an issue, they will post an {ask} on the issue they are wanting to sell; the ask price is how much they want to sell it for (supply). Traders will try to ask as high as they can, because they higher the price one sells something for, the more money one will have.
Prices of a stock are determined by what number the bid and ask meets at.
A trader cannot bid $2.00 for an issue trading at $20.00; no seller will want to meet that price. Because of this, the bidders will slowly raise their bid price until they can get their order filled. If no one wants to sell, but people want to buy, the buyers will have to raise their bid prices until someone is willing to sell.
In this case, demand outstrips supply (since there are more willing buyers than sellers), and the price goes up (as the buyers raise their bid prices). This is why prices will go up.
Similarly, a trader cannot ask for $200.00 on an issue that others are selling for $20.00; no buyer will want to pay that much. Because of this, the seller will slowly lower their ask price until they can get their order filled. If no one wants to buy, but people want to sell, than the sellers will have to lower their ask prices until someone is willing to buy (lower prices mean better bargains; the lower the price, the higher chance to get a buyer).
In this case, supply outstrips demand (since there are more willing sellers than buyers), and the price falls (as sellers bring the price lower with their decreasing asks). This is why prices will fall, as sellers can only find buyers when the price falls low enough.
Once the bid is high enough to match an ask, or vice versa, then a transaction occurs, and the price of the transaction becomes the listed price of the issue. Since everday, there are thousands of these bid/asks being filled, you will see the price charts of stocks fluctuate the way they do.
This also explains why buying pushes the price up; selling pushes it down. Hope that helps.
When you trade from a brokerage, the broker will either have a block of shares ready for you to buy, or they will pass on your buy order to a trader for the buy orderwho will input bid orders to fill your buy order.
If you trade on level III quotes, then you will actually placing bid / ask prices in yourself.
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The 1929 crash happened because all the capital was used in accumulating stock in "the roaring twenties" (high demand), and the demand kept eating stock up and pushing the price up. All the while, people would want to cash in their profits by selling (supply), which stayed relatively constant. However, in and around 1928-1929, the demand started to get exhausted (as everyone who had a single penny had it all in the stock market, and there was no more loose capital to invest and create demand).
As soon as some people wanted to sell their stock to cash in some of their profits, the small pool of supply easily dwarfed the nonexistant demand, and the price had to be pushed down until someone would work harder to put more money to buy the stock. However, these drops in price got more and more significant, and eventually, in 1929, enough supply (from fear) flooded the market, and swamped any demand, and pushed the price down.
In truth, the companies themselves weren't worth 80?ess, but the overwhelming supply pushed their value to 80?ess. Later on, during the great depression, many companies actually followed suit and dropped to 80?ess in value, or went bankrupt.
Source(s):
Previous answers, and experience.
Answered By: - - - - - - - - - - - - - - - - - 8/10/2009 |