The stock market is not just one market, but rather a number of stock exchanges spread across the world where traders and investors buy and sell shares of publicly listed companies. Stock prices change continuously in response to the law of supply and demand.
Where is the stock market located?
Two of the largest stock exchanges in the world are located in the United States: NASDAQ and the New York Stock Exchange (NYSE). Together, their market capitalization is valued in trillions of dollars, reflecting the value of all listed shares in the exchanges. By the end of 2018, the New York Stock Exchange reported a market capitalization of $28.5 trillion. By the end of 2019, NASDAQ reported a market capitalization of $9.8 trillion.
What is a stock market index?
The performance of the U.S. stock market is generally tracked over time by three major indexes: the Dow Jones Industrial Average (DJIA) (stock prices of the top 30 U.S. companies), the S&P 500 (stocks of 500 large-cap U.S. companies), and NASDAQ. Many components and sectors in the markets are followed by their own indexes. For example, the Russell 2000 index reports on 2,000 small companies.
Why invest in the stock market?
The stock market contributes to the U.S. economy. Investors who believe that the economy is growing invest in stocks because a strong economy helps companies increase their profits. The stock market is an important means for companies to raise capital to expand or start their businesses. Therefore, investing in the stock market is an investment in economic growth. New companies use the initial public offering (IPO) to sell their shares on approved exchanges like the New York Stock Exchange or NASDAQ and raise capital for growth. Investors who hold shares in initial public offerings can potentially profit when new companies go public.
Risks of investing in the stock market
The biggest downside is that you can lose your entire investment if the stock price drops to $0. If the company goes bankrupt, investors in stocks get paid last. For this reason, stock investing can be an emotional rollercoaster. Fees can eat away a significant portion of your investment, and the potential for fraud is a serious concern.
How to invest in the stock market
There are at least eight ways to invest in the stock market. The fastest and cheapest way is to buy stocks online. Online “discount” brokers like E-Trade, Merrill Edge, and TD Ameritrade offer commission-free stock trades and small fees for some other purchases like mutual funds. A new generation of app-based brokers, including Robinhood and Acorns, has emerged. This is self-directed investing, making it easy to place trades with a click on your iPhone or Android phone. Free services do not offer professional or individualized guidance. If you need more guidance at an affordable price, join an investment club, a group of individuals who research and invest together. A full-service broker will cost more but may be worth the price. They will provide professional recommendations based on your goals, risk profile, and budget. Large investment banks such as Goldman Sachs or Bank of America-Merrill Lynch offer financial planning in addition to executing trades. Money managers charge the highest fees but will do all the work on your behalf. Fee-based financial advisors charge an annual fee and provide advice on selecting investments or conduct trades on your behalf. Instead of buying individual stocks, you can invest in index funds or mutual funds. Many individual investors choose to do this to gain access to a wide range of investments selected by professionals. The riskiest option is a hedge fund. They may also invest in derivative instruments that can increase returns but will also increase risk.
Types
Other Financial Markets
The stock market is just one type of financial market. Before investing, make sure you are familiar with all types of financial markets. Commodities are usually traded in futures options, which makes them more complex. Commodities include grains, oil, and meat referred to by unusual names. The foreign exchange market is where people buy and sell currencies. It is extremely high-risk because values can change very quickly and significantly without any obvious reason. Derivative instruments are very complex securities that derive their value from underlying assets, such as subprime mortgages. Individual investors should steer clear of them. Although they can offer huge returns, they can also drain your life savings in a single day.
Frequently Asked Questions (FAQs)
When does the stock market open and close? The stock market opens at 9:30 AM Eastern Time on every business day, except for holidays when the market is closed. It closes at 4 PM on most days, except for holidays when the market closes early. Many brokers also offer access to trading outside of regular working hours. For example, a broker may allow trading orders to be placed from 7 AM to 8 PM.
How do you make money in the stock market? There are two main ways you can make money from stocks. The first way is through capital gains, which you achieve when you sell a share at a higher price than what you paid for it. When stocks rise, investors who hold them can realize a profit by selling their shares and achieving capital gains, or they can hold onto them longer in hopes of prices rising further for greater capital gains. The second main way investors earn profits from stocks is through dividends. When a company issues dividends, it pays shareholders a portion of the profits.
Source: https://www.thebalancemoney.com:443/how-does-the-stock-market-work-3306244
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