How Does the Stock Market Work?

By Peter Grofik

In business news we often hear about stock market going up or down. But what causes this action and how truly does the stock market work?
For accurate answering the question how does the stock market work, it's important to explain what is the stock market. When people hear words like stock market or stock trading, most of them imagine wall street or people on the trading floor yelling at each other. And all these things are part of the stock market. Simpy said, the stock market is a place where stocks are traded. And as for every market, there must be buyers and sellers. Buyers represent demand and sellers stand for supply.
The price of any stock is determined by relationship between supply and demand, by market participants willing to buy or sell at a certain price. If demand surpasses supply, price should go up. If supply surpasses demand, typically price goes down. This is famous principle from economy and it works in almost all markets.
From this results that for a deeper understanding of what makes the price of a stock change, it is important to know what affects supply and demand. There is a lot of aspects that influence price movement and their weight is relative because only buyers and sellers know why they bought or sold any given stock. Between these factors belongs news about company, industry or the whole economy. If good news comes out on a company, the price and demand for the stock mostly go up. When bad news appears, the price and demand mostly drop. Next factor is information about company's performance like sales growth, earnings, production and so on, next element is the market psychology, what is topic itself, and generally there is countless amount of other factors that influence actions of market participants.
And why companies offer their shares to the public? There is one main simple reason and that's money. When company offers their shares through the stock exchange via IPO, what stands for Initial Public Offering, company can obtain more capital by selling its shares.
At the present time the stock market is very organised and coordinated by computers in stock exchanges. Barriers for entry into the stock market for common people are relatively low and stock trading is becoming still more popular.
Peter Grofik is trader who is willing to share his knowledge and experiences at his blog Stock and Option Trading Strategies.
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