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How Does The Stock Market Work?
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Ray Baker
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By Ray Baker
Published on 10/14/2008
 
Many people who are beginning to invest or even thinking of investing are wondering how the stock market works. There is a large learning curve when it comes to learning how the stock market works

Many people who are beginning to invest or even thinking of investing are wondering how the stock market works. There is a large learning curve when it comes to learning how the stock market works especially when you take into account things like the Dow Jones Industrial Averages and the like. The stock market itself plays a largely important role in the overall economy in our country and while it may not personally affect you in a visible sense, it does affect the economy around you.

Let us pretend for a moment that you wanted to start your own business. You of course will need a bit of capital in order to do this and in an attempt to do this you have a number of options to choose from. You can opt to go to the bank for a loan, but chances are, that unless you have perfect credit this is not a viable option. You can also attempt to attract venture capitalists, but this is an extremely difficult task for almost anyone. As a result, the most viable option to start your business is by selling portions of ownership in the business. So you take your business, figure out the value of the business and then split it up into shares of the business. You as the main owner still get to run the business and get paid for it, the other owners that now own shares in the business also want to get paid. They are paid for their business in dividends.

This allows in investor in exchange for dividends to become a partial owner in the business without all the hassles with running it. This is what a share of stock is; it is a partial ownership in a company in which you do not have to do anything for it on a day today basis.

While you can sell these stocks to your friends, selling them to strangers is a difficult task. Well, not actually a difficult task, because that what a stock exchange is; a stock exchanges is a place for different investors to get together in order to buy and sell shares of someone else's company.

The biggest factor which affects a stock's value is its demand. If a stock is popular because a company regularly pays out dividends or even if they are going to be bought out, then the demand for the stocks increase and with that demand so does the stock's value. Furthermore, the lower amount of stock available in a particular company, the more that demand will affect its value.

Likewise, when people are trying to unload or sell their stocks in a particular company, the price goes down. The goal of any true investor is knowing when to purchase a certain company's stocks and knowing when to sell them before the price goes back down. As time goes by, you will develop more experience in dealing with this and will also develop your own investment strategies to ensure you are making the most profit you can in a given period.