How Does The Stock Market Work?

The stock market is the place where securities are traded (the stock exchange). In the United States, there are three main stock exchanges:

  1. The NYSE (New York Stock Exchange).
    It was formed in 1792, and it is the largest stock exchange in the US.
  2. The AMEX (American Stock Exchange).
    Before 1951, it was called the American Curb Exchange, because trading was done on the corner of Broad and Wall Streets in New York City. The AMEX has far less strict requirements than the NYSE, so the companies that use it are typically smaller.
  3. Another major stock exchange is the NASDAQ, or the National Association of Securities Dealers Automated Quotation System.
    Unlike the AMEX or the NYSE, there's no actual place where trading is done; all trades are done electronically. The ASE and NASDAQ have subsequently merged, but retain their own names.

The stock market's performance is evaluated in a few ways. The DJIA (Dow Jones Industrial Average) is but one measure, and we hear about it every day on the news. The DJIA consists of three indicators that include averages for industrial, transportation and utility stocks, as well as composite averages. The averages are a reflection of the mathematical average of the stock's closing price, and they also reflect the daily change in prices of the stock.

The stock market is an organized way to perform bond and stock transactions. Securities are those investments that serve as evidence of a debt, business ownership, or the legal authority to buy and sell ownership of such.

When the market moves up, it's considered to be a bull market. When the market declines, it's a bear market. The ROI (return on investment) is the yield plus any capital gains or losses. When a person invests, they always have the chance of losing money. Every investment comes with a certain level of risk, and those with the chance of higher returns carry a much greater risk than those with a lower return chance.

Although the terminology involved in the stock market can be confusing, the basic concepts are easy to understand. You buy shares in a company, and hold on to them until the market is right, and then sell for a profit. Knowing more about how the stock market works will help you navigate it more easily and make more money on your investment.