What Is the Stock Market?
The stock market provides a place for people to go who want to invest their money in stocks. They can buy stocks from people who already own them to hopefully earn money on their investment. It not only matches the buyer to the seller, but it also provides a way for them to agree on price. When the shares are bought, they are not bought from the company, they are bought from another investor. This is called a secondary transaction. The primary market is when the company sells the shares of stock directly to the investors, not through a middle person. The primary market gives the companies the capital they need so they can invest that to grow their businesses. The financial markets provide investment opportunities for investors. When an investor looks at the stock prices, they can make a pretty good judgment about where the productive opportunities are. The markets also provide risk management tools by allowing the investors to diversify the investments. They can transfer risk from those less able to tolerate risk to those who can tolerate risk. When you decide to buy stock, you decide the quantity you would like to buy, or how much money you would like to spend. You also need to research the companies to find out how risky of an investment you are getting into. You should research the previous returns that the company has produced as well as the previous financial statements. You need to find out whether the company is doing well at the present time, or if they are in a slump. From there you decide where you would like to invest. Then, you look up the ticker symbol for the stock that you decide to invest in. To buy in the secondary market, you then have to find someone that is looking to sell their stock. This
is when you may have to go to a brokerage firm for assistance, because they will find sellers easier. All that has to be done, is that you tell the broker what you would like to invest in, and they will help you. When you decide to make a market order, you need to understand the difference between a bid and an ask price and know the value of each. The bid price is how much someone is willing to pay for the stock at that particular point in time, and the ask price is how much someone is willing to sell the stock for at that point in time. The difference between the bid and ask price is known as the bid ask spread. This represents part of the cost of trading stock. Another way to think of the bid price is as the price that you will get when you decide to trade in the stock. The higher the ask price can be thought of as the price you will pay when you decide to buy the stock. For a limit order, if you think you may be able to get a better price on the stock, you tell the broker what the maximum price is that you want to pay for a stock. This is called a limit order because of the limit that you have placed on the price of the stock order. The broker also needs to know how long you would like the order to last, and the day that you tell them, the order expires at closing time. The typical time period that brokers make these orders last is between 30 and 60 days. With a limit order, if the price is too high, your order will not be filled immediately. But if and when the market price comes down, then the order will get filled. If the market price rises, the order may never get filled. This is a trade-off with a limit order. You could either get a better price by being patient and trying to wait, or, on the other hand, you may not get an order at all. After your order is placed, the broker that you hired is under a legal obligation to give you the best execution for your order. If the stock is listed on NASDAW, then your
broker sends the order to the market maker, alternate trading system, or electronic communications network, a regional stock exchange, or directly into the trading system. A market maker is a business that makes money by buying stocks when others are wanting to sell, and selling stocks when other people are wanting to buy. They may keep inventory on hand so they can provide good service to their customers in a timely fashion. The way that they make a profit is through buying at the lower bid price and selling the stock at the higher ask price. But they also have profits and losses that come with the inventory that they hold. Nasdaq market has over 300 market-making firms. Some of them are only market makers for only a few stocks, but others make markets in thousands of stocks. The broker will then decide where they would like to send your order. Direct access brokers will allow you to choose how you would like your order to be processed. Several market makers may be trying to quote the best price at one time. Some market makers even guarantee that they will match whatever the best price seems to be at a particular moment. These market makers not only need to compete on price, but they also have to compete on how quickly and efficiently they can execute an order at a particular time. Some brokers believe that to reduce the number of errors, it is best to file orders in house and not send them out to other people like market makers. Some brokers also decide to which market maker they will route all of the transactions for a particular stock if they promise to match the best possible price rather than to spend the time to find the market maker with the lowest price at that time. If you have a limit order, you will not see the rapid results that you do with the market orders. It really depends on how close your limit price is to the market as to how
quickly the order will be fulfilled. If your limit price is a long way off of the current market price, then it will take a longer period of time before the order is completed. If the limit price on the order is better than the best price currently in the market, then the market maker is legally required to display that quote through the Nasdaq system so that other investors can find out information about it and possibly trade with it. After the trade is completed, the parties who were involved in the trade must report them to Nasdaq, who can then transmit the information to everyone else in the world through data vendors. In the United States, the largest primary stock markets are Nasdaq, New York Stock Exchange, and the American Stock Exchange. When a company decides to list their stock, they can research and choose where they would like to list it.