How Does The Stock Market Work?

Although many people are familiar with the stock market in some regard, when asked specifically how the stock market works, most fail to come up with a clear and simple response. If you are one of the people who is unclear about the workings of the stock market, here are the basics that you need to know:

Going public

Where do stocks come from? The answer, in simple terms, is that stocks are created when a corporation “goes public” or sells shares through an independent public offering (IPO). This is a way that firms can generate capital rather quickly, by offering a set number of shares to the public at a certain price. When the public buys those shares, they become shareholders with a vested interest in the company and its profitability.

What next?

Once investors have purchased the stocks, they have two options: to wait for what they anticipate is a high value for the stock and then sell it or to hold onto the stock as part of a long-term portfolio. Either option has the potential for profit.

2 basic strategies investors will follow:

-Selling the share sooner. If the investor buys the stock for $10 per share and a week later, it is trading for $12 a share, they may chose to sell their shares promptly to make a quick profit. Two dollars may not sound like a lot of money, but if they bought 100,000 shares initially, selling them for $12 a share would be $200,000 of profit.

-Holding onto the stock. Many investors keep a stock portfolio in the hopes that this portfolio will provide a steady rate of earning that is higher than a traditional savings account or other options. In this case, they may receive dividend over the course of time that they keep the stock. Later in life, they may choose to sell it or to leave it to their children.

Why do stock prices fluctuate?

There are many reasons why stock prices increase and decrease. Some of the common causes for these changes are:

-health of the economy; if the economy is strong, prices tend to increase

-trading tends

-spending trends

-financial reports

-technical reports

The stock market is a complex and multifaceted financial institution. Although there are many ways for individual investors to begin buying and selling stocks, if you intend to make this a part of your long-term financial plan it is a good idea to consult someone with knowledge an experience like the staff at FBT Investments in New Orleans.

By: Savoie Andre

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Andre Savoie is the author of this article on Personal Financial Strategy. Find more information about New Orleans Investments here.