It seems that in business, you hear the word ‘stock market’ practically ten times every minute, but how exactly does it work?

Points, percentages, bright red lines trending downward – trying to make sense of the stock market may seem like a daunting task at times. With all of those investors running helter-skelter on the floor of the stock exchange to the distracting bells ringing in the background as the trading begins each day creates a nerve-wracking din that is not really conducive to wanting to learn about the function of the stocks. And all of those investing terms? How are you supposed to know what all of those mean? Here is a breakdown of the stock market and its basic process to give you a rough idea of how it all works: 

  • Stocks themselves are shares of ownership of a company. When a person purchases stock, they purchase a portion of a corporation. Investors may refer to stocks as shares or equity as well.
  • Shareholders are the people who own the stock. Shareholders receive their earnings when the corporation in which they invest turns in a profit. Alternatively, if the corporation they invest in loses some of its value, the shareholder will be negatively affected as well.
  • Risk is what you take when you invest. You are risking losing your money or doubling it when you choose to buy a company’s stocks. Risk can seem scary because there is a real chance that you could lose a good portion of your cash. In fact, many people have lost in the stock markets. But risk is actually a fairly neutral concept because not only can you lose money, you can also see some decent earnings. There are dozens of investors who have made their wealth with the stocks. Risk does not ensure that an investor will lose or that he will win, risk is simply the figurative chance that an investor takes when investing and does not guarantee the outcome.
  • The New York Stock Exchange (NYSE), the NASDAQ, and the Dow Jones – you have probably heard them mentioned on the news at some time or another. It is on the floor of one of these exchanges that stocks are traded and where the buyers and sellers will negotiate a price for the stocks. Stock exchanges can be physical locations, but these days there are plenty of virtual trading floors that amateur investors can utilize on the web.
  • There are two markets: Primary, also called the IPO, which is where the securities are established. The secondary market is where those securities are traded.
  • The market’s status is referred to either as a bull or a bear. A bull market is one in which the economy is growing. Stock prices are going up and there is an air of optimism. A bear market is one that is lacking in confidence. Investors will be hesitant, and the markets will be either stagnant or declining. 

Once you figure out all of the little branches that make up the stock market, you will be able to better understand how the massive machine functions. However, the markets can be uncertain – ironically, that is the only thing that an investor may be certain of. If you plan to invest in something that you know you will benefit from, then sign up for a Harvard University Credit Card. With no hidden fees to suck your money from your account, a credit card from Harvard University has no down sides.

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