Invest in the Stock Market: The Stock Exchange
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Previously, we gave an overview of stocks to help you in investing your money. In this article, we deal with the mecca of stocks – the stock exchange.
The Stock Exchange
The stock exchange is a place where stock buyers can interact and transact with sellers. Some stock exchanges are physical locations; that is, stock transactions occur on a real trading floor. The best example of such exchanges is the New York Stock Exchange (NYSE). Other exchanges are virtual ones and run atop a telecommunications network. The NASDAQ is a prime example of a virtual stock exchange. The NYSE is home to America’s largest and most established companies such as General Electric and Wal-Mart, while NASDAQ is the abode of high-tech mammoths such as Microsoft and Intel.
The top four stock exchanges in the world ranked by market capitalization are (in descending order) the NYSE, the Tokyo Stock Exchange, the NASDAQ, and the London Stock Exchange. Consequently, New York, London, and Tokyo are the world’s prime financial hubs. Hong Kong is another trading center.
Wikipedia offers a good overview of what happens in the exchange:
Actual [stock exchange] trades are based on an auction market paradigm where a potential buyer bids a specific price for a stock and a potential seller asks a specific price for the stock…when the bid and ask prices match, a sale takes place on a first come first serve basis if there are multiple bidders or askers at a given price.
Basically, a buyer can offer a bid price for a stock, while a seller can set an initial ask price. The difference between these prices is the bid-ask spread. The objective in a stock transaction is to match the bid and ask prices; that is, to reduce the bid-ask spread to zero.
Stock prices in the exchange are subject to the law of supply and demand. If there is a greater demand for a particular stock than its supply, the price goes up. On the other hand, if the supply is greater than the demand, the price goes down. Traditionally, the stock’s price movement indicates what the investors feel a company is worth; that is, the company’s market capitalization, which is the stock price multiplied by the number of outstanding shares. In turn, the company’s value is affected by many factors, most important of which is its earnings (profits).
In the stock market (especially in the US), the “bulls” and the “bears” are common sights. Not literally, however, but metaphorically. A bull market refers to one which enjoys a robust economy, a rising gross domestic product (GDP), and rising stocks. Here, investing in stocks is much easier and profitable. On the other hand, a bear market suffers from a bad economy and falling stocks. Investing in a bear market is a tough venture, as profitable stocks are rare.
Next: Invest in the Stock Market: Tips for Stock Investors
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