Stock Market News

1. 3 Responses to “How does the stock market work?”

2. By Bulls VS Bears on Mar 1, 2009 | Reply

   The expression ’stock market’ refers to the market that enables the trading of company stocks (collective shares), other securities, and derivatives. Bonds are still traditionally traded in an informal, over-the-counter market known as the bond market. Commodities are traded in commodities markets, and derivatives are traded in a variety of markets (but, like bonds, mostly ‘over-the-counter’).

   The size of the worldwide ‘bond market’ is estimated at $45 trillion. The size of the ’stock market’ is estimated at about $51 trillion. The world derivatives market has been estimated at about $480 trillion ‘face’ or nominal value, 30 times the size of the U.S. economy…and 12 times the size of the entire world economy. It must be noted though that the value of the derivatives market, because it is stated in terms of notional values, cannot be directly compared to a stock or a fixed income security, which traditionally refers to an actual value. (Many such relatively illiquid securities are valued as marked to model, rather than an actual market price.)

   The stocks are listed and traded on stock exchanges which are entities (a corporation or mutual organization) specialized in the business of bringing buyers and sellers of stocks and securities together. The stock market in the United States includes the trading of all securities listed on the NYSE, the NASDAQ, the Amex, as well as on the many regional exchanges, e.g. OTCBB and Pink Sheets. European examples of stock exchanges include the Paris Bourse (now part of Euronext), the London Stock Exchange and the Deutsche Borse.

   Participants in the stock market range from small individual stock investors to large hedge fund traders, who can be based anywhere. Their orders usually end up with a professional at a stock exchange, who executes the order.

   Some exchanges are physical locations where transactions are carried out on a trading floor, by a method known as open outcry. This type of auction is used in stock exchanges and commodity exchanges where traders may enter “verbal” bids and offers simultaneously. The other type of exchange is a virtual kind, composed of a network of computers where trades are made electronically via traders.

   Actual 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. (Buying or selling at market means you will accept any ask price or bid price for the stock, respectively.) When the bid and ask prices match, a sale takes place on a first come first served basis if there are multiple bidders or askers at a given price.

   The purpose of a stock exchange is to facilitate the exchange of securities between buyers and sellers, thus providing a marketplace (virtual or real). The exchanges provide real-time trading information on the listed securities, facilitating price discovery.

   The New York Stock Exchange is a physical exchange, also referred to as a listed exchange — only stocks listed with the exchange may be traded. Orders enter by way of exchange members and flow down to a specialist, who goes to the floor trading post to trade stock. The specialist’s job is to match buy and sell orders using open outcry. If a spread exists, no trade immediately takes place–in this case the specialist should use his/her own resources (money or stock) to close the difference after his/her judged time. Once a trade has been made the details are reported on the “tape” and sent back to the brokerage firm, which then notifies the investor who placed the order. Although there is a significant amount of human contact in this process, computers play an important role, especially for so-called “program trading”.

   The NASDAQ is a virtual listed exchange, where all of the trading is done over a computer network. The process is similar to the New York Stock Exchange. However, buyers and sellers are electronically matched. One or more NASDAQ market makers will always provide a bid and ask price at which they will always purchase or sell ‘their’ stock. [1].

   The Paris Bourse, now part of Euronext, is an order-driven, electronic stock exchange. It was automated in the late 1980s. Prior to the 1980s, it consisted of an open outcry exchange. Stockbrokers met on the trading floor or the Palais Brongniart. In 1986, the CATS trading system was introduced, and the order matching process was fully automated.

   From time to time, active trading (especially in large blocks of securities) have moved away from the ‘active’ exchanges. Securities firms, led by UBS AG, Goldman Sachs Group Inc. and Credit Suisse Group, already steer 12 percent of U.S. security trades away from the exchanges to their internal systems. That share probably will increase to 18 percent by 2010 as more investment banks bypass the NYSE and NASDAQ and pair buyers and sellers of securities themselves, according to data compiled by Boston-based Aite Group LLC, a brokerage-industry consultant [citation needed].

   Now that computers have eliminated the need for trading floors like the Big Board’s, the balance of power in equity markets is shifting. By bringing more orders in-house, where clients can move big blocks of stock anonymously, brokers pay the exchanges less in fees and capture a bigger share of the $11 billion a year that institutional investors pay in trading commissions[citation needed].

3. By John B on Mar 4, 2009 | Reply

   A company can issue “shares” that represent ownership in a portion of the company. For example, if a company has issued 1,000,000 shares and you own 1,000 of those shares, then you own 0.1% of the company. The word “stock” is another word for “shares”.

   A stock market (there are actually several) is a system that enables people to buy and sell these shares. Each stock market operates slightly differently, but in general this is how buying and selling works:

   If you are selling, then you tell the market how many shares you want to sell and for what price. If someone else has told the market that they will buy shares for your price (or higher) then your shares are sold to that person. Otherwise, you have to wait until someone is willing to pay that price.

   On the other side, if you want to buy shares, you tell the market how many shares you want and how much you will pay for them. If someone has told the market that they will sell for that price (or lower), you buy the shares from them, otherwise you have to wait until someone is willing to sell the shares at your price.

   The reported price of a stock is simply the price of the stock in the last trade.

4. By Senator on Mar 7, 2009 | Reply

   If there is good news that benefits the stock market, it goes up. If there is bad news, it falls.

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