Learn How The Stock Market Works

Learning How The Stock Market Works can help you on the path to becoming a successful stock trader.

When you hear on the news that the Dow was up 20 points, S&P 500 up 2, and the Nasdaq up 1, what does this mean? Well lets look at the Dow first. The Dow Jones Industrial Average has 30 company's in the group. So when you hear that it was up 20 points on the day, what that tells you is that the average value of those 30 company's was up. The same is so with the S&P 500, this group is made up of 500 company's and they take the average value of those company's. This gives you an idea of how the 9000 + company's in the stock market are doing. If the DOW was down 100 points you would know that most of the stock prices of those 30 company's did not go up in value


Now lets look at an individual company. What is a share of stock, how do they arrive at the amount of shares, and where does the price per share come from?

Lets say you invented a hot new product that will help make peoples lives a lot easier. In order to make this product you are going to need the equipment to make it, the supply's to make it, the people to make it, and a building to make it in. All of this is going to cost a lot of money, money you probably don't have.

Just to keep this simple i will not get into the legal aspect, such as talk about corporations and privately held company's. I am just giving you the basics so you have an understanding on how the stock market works.

Ok so you figured out it is going to cost you 10 million dollars to get everything you need to start making this hot new product. How are you going to get that kind of money? By selling shares of stock to people who believe in your new product, and believe it is going to be a big success and make a lot of money. So when they buy shares of stock they are investing their money on hopes of making more money.

So you sell one million shares of stock at $10.00 a share and that will give you the 10 million dollars you need to start making your product. That is where the number of shares and the price per share comes from. As your company grows and starts to make money more people will want to invest in your company and the price per share of stock will rise.

It is about supply and demand. When more people want to buy shares of stock in your company (demand), but the people holding on to the existing shares (supply) do not want to sell them at the current price there will be offers to buy the stock at a higher price.

By: Joe Grabowski

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