How Stock Markets Work

Companies need capital in order to make businesses grow. Two of the most popular and common ways companies raise capital are through debt financing, or through equity financing or selling a part of the company. The stock market is all about the latter of these two methods. The stock market is a mechanism in which shares of companies are actively traded; this commerical activity tends to push individual stock prices either higher or lower.

Stock markets are referred to as secondary markets. A secondary market is a market wherein the seller is no longer the issuing company, but rather just a stockholder as well. Primary markets are markets wherein the proceeds of the sale directly go to the company. An analogy of primary and secondary markets is selling a car. If person A buys a brand new car from a car manufacturer, it is considered a transaction in the primary market because person A buys from the company itself. However, if person A decides to sell the car that he bought to person B, the transaction is now in the secondary market because person B is not directly buying it from the original source.

How stocks are being bought and/or sold happens fairly simply. People who buy and sell stocks are called traders. Traders typically work through stock brokers in order to execute a buy and sell order on particular stocks. Brokers serve as the link between people who want to trade and the stock exchange. Once the order is sent to the exchange, the brokerage will then look for a matching buy or sell order. A match happens when a buyer and seller’s price are the same or both agree at the same transaction price.

If there are a lot of buyers, normally stock prices go up since people are more than willing to buy at a higher price pushing the demand up. On the other hand, if there are a lot of sellers, then stock prices normally go down because people want to liquidate and are willing to let go of their stocks at lower prices.

Looking at it as a whole, the stock market is a good barometer of a country’s economy. If most companies have rising revenue and profit, it is normally an indication that economic conditions are also good. If the stock market does not yield growing returns, it normally reflects a bad economy.

The stock market is all about earnings; earnings provide fuel to companies. Without earnings, companies as we know them would not exist and the stock market wouldn’t exist either. If companies show good earnings, the stock market generally does well since prices will rise.

Summing it all up, buying and selling shares can be done through brokerages. Nobody can go directly to the stock market and trade shares. Stock prices generally go up if overall economic conditions are good and when the earnings of companies are impressive. However, stock prices plummet if overall economic conditions are bad and if corporate earnings do not grow.