“The financial market is a reflection of the world it operates in, the essential meaning of the wisdom of money in action, expressed through buying and selling companies’ shares, it is always right.”
Economist John Maynard Keynes likened the stock market to a beauty contest in which competitors try to pick the prettiest faces from a group of photographs. The winner is the person who selects the most popular choice, who may not be the 1 he or she finds most attractive. That from the man who said that beauty and intelligence were rarely found in the same person, Quaint, Whot!
This is what it is and how it works sans fanciful metaphors.
The concept behind how the stock market works is very simple. Operating much like an auction house, the stock market enables buyers and sellers to negotiate prices buy, sell and make trades.
The stock market works through a network of exchanges.
Companies list shares of their stock on an exchange often through a process called an IPO. Investors purchase those shares, which allows the company to raise money to grow its business. Investors can then buy and sell these stocks among themselves, and the exchange tracks the supply and demand of each listed stock.
That supply and demand help determine the price for each security, or the levels at which stock market participants, investors and traders are willing to buy or sell.
Today, computer algorithms do most of the calculations.
Buyers offer a “bid,” or the highest amount they are willing to pay, which is usually lower than the amount sellers “ask” for in exchange. This difference is called the bid-ask spread. For a trade to occur, a buyer needs to increase price or a seller needs to decrease the price.
Historically, stock trades took place in a physical marketplace. Today, the stock market works electronically, through the internet and online stockbrokers.
Each trade happens on a stock-by-stock basis, but overall stock prices often move in tandem because of fundamentals, technicals, news, political events, economic reports and other things, social issues not often 1 of them as they are difficult to value. The stock market has a long history of ignoring social unrest.
As, with any investment, there are risks and rewards.
Stocks carry more risk and more potential for reward han some other securities. The market’s history of gains suggests that a diversified stock portfolio will increase in value over time.
To build a diversified portfolio without purchasing many individual stocks, 1 can invest in a type of mutual fund called an index fund or an ETF (exchange-traded fund).
Such funds passively mirror the performance of an index by holding all of the stocks or investments in that index.
For example, you can invest in both the DJIA and the S&P 500, as well as other market indexes through index funds and ETFs.
Stocks and stock mutual funds are ideal for a long time horizon but unsuitable for a short-term investment.
Have a healthy weekend, Keep the Faith!
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