How does the stock market work?

The stock market has now fully entered the digital age, and most shares are traded electronically. Formerly, individual 'specialists' did all the trading. They are now involved in a minority of transactions, though there are many who think that an increased role for human beings is essential to prevent meltdowns like last year's 'flash crash.'

Stock market histroy and theory

The idea behind the stock market is much simpler than its actual working. Public companies are owned by stockholders, who buy and sell shares in an open market. Historically, all transactions were funneled through a physical stock exchange. New York Stock Exchange (NYSE) The largest exchange has always been in New York. There, specialists would receive buy and sell orders and match them up. If there was a temporary mismatch, the specialist himself would buy shares and hold them until the market settled down. Nasdaq With the advent of the Internet and electronic data storage, it was inevitable that traders would develop a stock market online. Nasdaq is basically a bunch of computers into which buy and sell orders are fed. This system works well when trading is liquid, meaning that there are enough buy and sell orders to keep the market stable. Occasionally, however, there is an imbalance, and the computers simply don't know how to correct it. This apparently happened in the crash of 1987 and the flash crash of 2010. Individual investors Historically, individual investors made up much of the trading, getting stock advice from their brokers. They would submit orders to the broker, who would pass them on to the stock exchange for execution. Today's trading is much different.

Modern stock trading

Electronic trading Today, it is possible to execute an online stock trade in a fraction of a second with the click of a mouse. Stock market information Stock market info is also readily available online. Stock market advice is everywhere: from online brokers, bloggers, and independent companies. Learning about the stock market is just a matter of pursuing all the available electronic data. A stock market education is just a matter of clicking away. Mutual funds, pension funds and hedge funds Most of the trading today is done by managers of hedge funds, mutual funds and pensions with large accumulations of money. One large fund making a substantial purchase can move a stock dramatically. Long term performance of stocks Over time, virtually all stocks' prices reflect their fundamental value, based on price/earnings ratio, dividends, and prospects for growth. Investing in penny stocks Some companies are too small to be traded on the major exchanges. The penny stock market allows trading in their shares. These shares can fluctuate wildly in price.