Stock Market Basics

In understanding the stock market we cover what the stock market is, how it works and the best way to buy and sell stocks. Let’s look at understanding the stock market…

What is the Stock Market?

The stock market is an organization that allows people to buy and sell shares in publicly listed companies. After purchasing shares, investors become part owners of the businesses that the shares represent.

As owners of the business, investors are entitled to a share of the profits in the form of dividends. The other benefit is that the shares can be sold in the future, hopefully for a nice profit.

Companies also benefit from the sale of their shares. The stock market gives them a means by which they can secure funds to grow their businesses.

How the Stock Market Works

Investors cannot buy shares directly from the stock market. That’s where stockbrokers come in. Stockbrokers are people authorized to buy and sell stocks and derivative products from the market.

There are two main stockbroking options. Investors can use what’s known as a “full-service broker” to do their share buying and selling. This is the more expensive option. It requires engaging the services of someone qualified as a stockbroker. It might cost $100 to $150 for a trade.

The second option is an online broker. This is a cheaper and more convenient option. There’s no need to make an appointment. You just login to the service over the Web. Put in your order by filling out a form and submitting it. It costs from about $5 to $30.

The Buying and Selling Process

The stock market connects buyers and sellers. A buyer will put in a “bid” price. This is the price the buyer is prepared to pay for the stock. The seller of the stock will put in an “ask” price. This is the price the seller wants. A computer program is used to match the bid and ask prices.

As an investor, you don’t get caught up in the machinations of how the stock market does it buy and sell processing. It all happens behind the scenes. With an online brokerage, you just put your buy or sell order in and wait for the deal to go through.

When placing an order to buy or sell stocks. Using an online broker. Depending on the online broker you use, they sometimes give you two options:

  1. Specify the exact buy or sell price you want. This is commonly referred to as a “standing order”.
  2. Buy or sell at the price the stock is currently trading at. We’ll call this “meeting the market”.

Standing Orders

With the first option, you can put in a buy or sell order and specify the price you want to pay (in the case of a buy), or the price you want to receive (in the case of a sell). When the stock reaches the price you specified in your standing order, the order is then executed.

Sometimes the price you’re looking for won’t be achieved. You might be trying to sell your shares for a price that buyers aren’t prepared to pay. Or, you might be trying to buy shares at a price that no one is prepared to sell for.

Your order will usually remain in the queue for a predetermined amount of time. How long your order will sit in the queue depends on the broker in question. Some allow the order to remain valid for up to two weeks. If you don’t happen to achieve the stock price you specified in that time then the order doesn’t go through. However, you still might end up paying the brokerage fee.

Meeting the Market

The second option is the buy or sell “at market”. This allows you to put in an order that will be executed promptly. I find this to be the most convenient option. You buy or sell at the price the stock is currently trading at – at that particular moment in time. There are two requirements you need to abide by when using this option:

  • You need to know what price the stock is currently trading at (the online broker will usually display the current price), and
  • You can only perform an “at market” buy or sell trade during the stock market’s hours of operation

Theory and Practice

Understanding the stock market can only be achieved by gaining relevant knowledge and putting it into practice. It’s time in the market that really matters. But before getting your feet wet you need to master the basic concepts.

Working through the lessons here at Stock Market College, and reading the recommended books will give you a good theoretical understanding of the stock market and how to invest profitably.

Another good approach can be to subscribe to an investment newsletter that has a history of performing well. By studying the report and the author’s stock selections you can learn what the experts look for.

Summary Points

  • Stock markets are organizations that allow people to buy shares in some of the most successful companies in the world
  • The stock market works by matching buyers and sellers
  • One of the most convenient and cost-effective ways to buy and sell stocks is using an online discount broker
  • When buying or selling shares, “meet the market”