How the stock market works

buy stocks

The stock market works like any other marketplace, except the products being bought and sold are pieces of ownership in companies. We call these shares of stock. Stocks are traded on exchanges, and you can think of an exchange as the marketplace. In the U.S., major exchanges include the New York Stock Exchange and the National Association of Securities Dealers Automated Quotation system (the NASDAQ).

  • Stock prices move up and down depending on supply and demand. When there is a large demand for a stock, its price will rise. When there are lots of sellers, the price will fall. Note that a stock’s price is a reflection of the market’s opinion of it, not necessarily the actual value of the company. This means that short-term prices are often affected by people’s emotions, rather than by fundamental facts. Prices can move based on tidbits of information, misinformation, and rumor.
  • The basic motivation in buying stocks is to purchase shares of a company that will increase in value over time. Shares can be expected to rise in value when more demand for them appears, typically as the issuing company performs well. [2] The difference between your purchase price and a subsequent selling price represents the profit you stand to make when investing in stock.
  • For example, imagine that you buy 100 shares of stock priced at $15 each. That’s a $1,500 investment. If, after two years, the stock price has risen to $20, your $1,500 investment has turned into $2,000, giving you a $500 profit if you sell right away (disregarding broker fees).
  • On the other hand, if you buy 100 shares of a stock priced at $50 each, you’ve made a $5,000 investment. If at some point in the future the stock price has fallen to $25, your $5,000 investment has turned into $2,500, giving you a loss of $2,500 if you sell your shares at that point.

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