How Does the Stock Market Work? - AstroWealth Skip to main content

What is a stock market share or stock?

A stock or a share represents part ownership in a company. Shareholders own a portion of the company equivalent to the number of shares held as a percentage of the company’s total outstanding shares. There are two primary types of shares: common and preferred. Common shares usually carry voting rights which allow the shareholder to vote in corporate meetings, whereas preferred shares generally do not. However, preferred shares have preference over common shares for dividends. 

What is a stock market index?

A stock index represents the movement of a group of shares in the financial, commodities, technology, commodities, or any other market. It is a useful indicator of the changes taking place in the stock market. Often, when discussing the stock market, people say “the market is up” referring to a stock index. 

Why do companies issue shares?

When a company starts out, it must establish large amounts of capital which are typically accessed through selling shares (equity financing) or borrowing money (debt financing). Equity financing requires selling shares to the public through an IPO and allows companies to raise capital quickly and grow at a frenetic pace.  

How are stock market prices determined?

Stock prices are largely determined by the laws of supply and demand. If there are more buyers than sellers of a specific stock, the stock price will go up. However, if there are more sellers than buyers, the price will go down. 

How do stock market exchanges work?

The stock market operates through a network of exchanges, such as the New York Stock Exchange and Toronto Stock Exchange. Companies list their stock through an IPO and investors purchase shares. From this point, investors trade stocks among themselves. When potential buyers invest in stocks on the stock market, they buy from existing shareholders rather than the company itself. Therefore, stock exchanges allow existing owners of shares to transact with potential buyers. 

Buyers offer a “bid,” which is the highest amount they are willing to pay and sellers set an “ask”, which is the amount they would like to sell at. The difference between the two is called the “bid-ask spread.” 

What are the risks of investing in the stock market?

Many of the risks associated with the stock market can be reduced with the right investment strategies and long-term approach. For example, day trading involves rapidly buying and selling shares based on price swings and is very risky. However, investing in low-cost index funds that track the entire market can be an excellent way to build wealth over time. 

How to invest in the stock market?

  1. Determine the type of account you want to open whether that’s a retirement savings account, college savings, or something else.
  2. Open a brokerage account by researching companies, considering their fees, and analyzing their investment options.
  3. Choose your investments, from stocks and bonds to mutual funds, index funds, and more.

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