How Does the Stock Market Work?

November 16, 2020

Companies sell stocks or shares of their company to raise capital. They sell the shares on the stock market. Investors can buy and sell shares throughout the trading days to build and maintain wealth.

 

How the Stock Market Works

The stock market is like an auction. Companies list their stocks and investors bid and buy the shares. When a company first enters the stock market, they issue an Initial Public Offering. The stocks are usually offered at a discounted price but may rise or fall quickly depending on investor reactions (supply and demand).

Once stocks are in the market, buyers offer ‘bid prices’ or the price they’re willing to pay and sellers have ‘ask prices’ or the price they want for their shares. Once they agree, a sale is made. Investors can buy and hold, keeping the shares for as long as they want. They can also sell at any time.

The higher the demand for a stock, the higher the price goes. The lower the demand, the less sellers can get for the shares.

 

How do you Make Money in the Stock Market?

You make money in the stock market when you buy low and sell high. This doesn’t always happen, but it’s the goal.

Doing your research, you’ll see a stock’s historical prices. Use this to make investing decisions. Avoiding emotional decisions and either buying on impulse or selling out of fear increases the chance of making money in the stock market. On average, the stock market offers a 9% rate of return over 10 years, which is why it’s smart to invest in stocks you will buy and hold.

 

Can you Lose Money in the Stock Market?

Everyone can lose money in the stock market and you probably will. The key is to diversify your investments. Don’t put all your money in one stock or completely in stocks.

When you diversify, you offset the chance of a total loss. For example, if the stock market crashes, but you have money in bonds or treasury securities too, you won’t lose everything. Even if the stock market does crash, avoid pulling out immediately. Things usually turn around and if you’re using a buy and hold strategy, you should ride out of the storms.

 

How can you Invest in Stocks?

You’ll need a ‘stockbroker’ to invest, but it’s not what you think. Before the internet, you’d need a human stockbroker and you’d pay high commissions. Today, you can sign up with a discount broker online or even a robo-advisor (computer) for a fraction of the cost (sometimes even $0 commissions). 

The stock market is a great way to invest at least some of your money. Whether you use a stockbroker, robo-advisor, or you have an Employee Stock Purchase Plan at work, include stocks in your investment plan to increase your wealth, prepare yourself for retirement, and be a part of the success of businesses both small and large.

Rahul Iyer

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