How the Stock Market Works

First, let us start with some knowledge about the stock market in general. Companies offer to sell shares of stock in their own company for a specific price. The first day a company's stock goes public is known as an IPO, which is initial public offering. Companies do this in an effort to raise capital. Then the shares of that company are sold on an exchange such as the NYSE, NASDAQ, RUSSELL 2000, S&P 500 etc. Stock traders and investors trade the shares of these companies through the exchanges. As stock traders buy shares the price goes up and as they sell the shares the price comes back down. There is a constant struggle between the buyers and sellers therefore causing the price to constantly rise and fall.

The exchanges in the United States operate by one of two ways: automation and physical floor brokers, those who actually work on the trading floor at one of the exchanges, however, their transactions are electronic as well. The U.S. markets are open from 9:30 am to 4:00 pm Eastern standard time except for holidays. There are over 8,000 stocks to choose from making it essential for the individual stock trader to be prepared when beginning their trading day.

Due to more and more technology over the years, trading stocks has become widely available to anyone who is interested in trading and has money and internet. Many years ago individual traders had to call in their order over the phone which, as you can imagine, was much more laborious. Today, you can buy and sell stocks with the click of a button or two. There is also a vast amount of information to be found and studied on the internet in order to gain more knowledge about trading stocks.

There are several factors that cause a stock’s price to fluctuate. Two of these factors are fear and greed demonstrated by the traders and investors. Being able to understand the effects that human behavior has on the stock market will substantially increase your success in trading. As a stock’s price runs higher and higher, this is a clear sign that greed is in control. As the stocks price starts to peak, turns and starts declining, you will know that fear has set in, as the stock traders who bought shares at a lower price begin taking some of their profits and the sellers show up again. Thus begins the natural rise and fall of the stock’s price.

World news also has an obvious effect on the movement and direction in the stock market. Sometimes it is more dramatic, such as when the economy is suffering. This news puts a lot of fear in investors, causing the stock market to move downward. Then, you will notice, as the fear is relieved by announcing some improvements, the stock market begins to move upward as traders put more money into the markets. When reviewing the news, pay attention to specific events taking place with individual stocks. For example, look for analyst upgrades or downgrades, earnings reports, and FDA approvals or disapprovals. This will give you an edge in your day trading. Since fear and greed will always remain as part of human nature, these patterns, of stocks prices rising and falling, will also continue. The sooner you can recognize these patterns, as they begin to form, the better you will be able to determine how to enter a trade and produce more profit.

Stocks can also move in groups or sectors that may run for several weeks, months, or up to a year or more. Watch for different sectors that move and choose the strongest stock in that specific group to buy. Some of these sectors have enough momentum to continue for quite a while and those are usually the ones that profit the stock trader large sums of money. As you are watching your investment, take notice when the stronger stocks in any given sector start to slow down, as this is a good indication that the sector has started to turn; this is when you should consider capturing profits. Typically, when the strongest sectors start to turn the market is starting to turn as well.

Learning about the factors that cause the rise and fall in the stock market helps the individual stock trader be able to more clearly decide their trading strategies. The more easily you are able to read what is going on psychologically in the stock market, the more easily you will be able to profit from the cycles of other traders’ fear and greed. It may be difficult mentally to go against the grain, and trade the opposite direction when you notice these cycles approaching, however, the more often you are able to do so, the more money you will likely make.

TradeStocksAmerica Staff

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