Stock Market Frequently Asked Questions
Still trying to wrap your head around the basics of the stock market? Today’s article is another angle of attack. You can check out all of our articles related to stocks and investing by clicking here.
A stock is an ownership interest in a company. When you hear of someone buying a stock, they are buying ownership interest in a company.
A few entrepreneurs pool their money together to start a business. These founders get a certain percentage of ownership of this new company based on their investment size compared to the total money invested by all the founders. The company is privately owned by the founders at this point.
Once the company grows, it may need to raise additional capital from investors in order to cover growth expenses so the company may decide to go public and get listed on the stock market exchanges.
As a result, the company sells off a portion of its shares to the public to raise capital. Down the road when the company has excess cash from operations in the future it can buy back shares to gain back more ownership control.
Stock is simply ownership in a company. If you buy shares of a company you’ll own a percentage of the company. The better the business does, the more your shares will be worth.
Big time investors can buy enough percentage of a company to get on their board of directors and be able to have a say in company management and possibly dividends as well as other things related to the company and business operations.
So what is the stock market? Read the following Q&A section below to gain a better understanding of some common questions people initially have when trying to understand stocks.
The Stock Market
1. What is it?
The stock market is a place where people come together to trade their shares of stock(s). People who want to purchase a company buy the stock from another person who wants to sell their ownership interest of that same company.
2. When Does It Trade?
The stock market trades Monday through Friday from 9:30am to 4:00pm eastern time. The only days the market is closed are holidays. The day after a holiday the market closes early at 1:00pm and sometimes it’s the day before instead of day after depending on the holiday. You can find the schedule for holidays by searching “stock market days closed schedule” on Google.
3. What are the Different Stock Exchanges?
Stocks are traded on several different exchanges. Here are a few:
- The New York Stock Exchange (NYSE) is the largest in the world and U.S. by market capitalization and is headquartered in New York.
- The NASDAQ is also headquartered in New York and is the second largest exchange by market capitalization.
- The Tokyo Stock Exchange, headquartered in Tokyo, Japan, is the third largest and the London Stock Exchange is the fourth largest.
- Pink Sheets – Tiny companies, penny stock type companies, very volatile price action
- OTC Bulletin Board (OTCBB) – Non NASDAQ listed stocks that rarely trade over $5.
4. Is it Complicated to Trade Stocks on Your Own?
In today’s world stocks are traded electronically whereas in the old days people used to think of stocks as slips of paper that were exchanged by hand. You can trade stocks from your bedroom simply entering your order online with a brokerage company who then buys or sells your shares for you within milliseconds.
5. What is a Stock Price? How to Value a Company?
Stock price is a share or slice of the current total value that the market thinks a company is worth. The company’s value is divided by its number of shares to equal the stock price. Therefore don’t compare two companies by their stock price but instead by their total market value if you’re trying to determine which company is worth more. Apple is the largest company by market value at over $700 Billion (2015).
6. What is Causing the Changing Stock Prices?
Over the short term, the behavior of the market is based on enthusiasm, fear, rumors and news. Over the long term, though, it is mainly company earnings that determine whether a stock’s price will go up, down or sideways.
There are buyers and sellers in the stock market and they trade shares at market price. You won’t find one guy trading at $10 and another at $2 for the same stock. Instead one guy may trade at $5.50 and another may trade at $5.65 or $5.43. The spread between trades isn’t huge.
Market price changes every second as a result of supply and demand
- Demand is Buyers and Supply is Sellers
- Think of an auction. If there are a lot of buyers fighting for shares of a certain company that is very profitable, the stock price will rise when demand is greater than supply.
- When supply is greater, meaning a lot of sellers are in the market and not many investors are looking to buy shares, then the stock price will decrease as each seller keeps lowering its offer to attract the buyer.
So what changes the demand and supply of a stock? There are many factors that will be explored in future articles.
See my eBook: The Book on Stock Market Investing, which dives into every topic you need to know to get started investing and how the stock market works. I’ll also be finalizing a course on Company Valuation so you can learn how to value stocks and estimate share prices to find investments worth buying. Or just listen to Warren Buffet who I share a lesson on in my newsletter.
Check out some of these other posts relating to the stock market:
- Stock Market Vocabulary
- Stock Market Investing 101: Beginner’s Guide
- Bull vs Bear Market
- Buy Low Sell High Strategy
- Beware of this money killer
- How Much Do You Need to Start Investing
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