How does the stock market work?

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June 3, 2013 by tradersnote

When you first start out in trading it might seem like the stock market is a whirlwind of changing numbers that is going over your head. So let’s break down the action of the stock market and look at how it can work for you.

Firstly, before you can get started trading on the stock market, you’ll need to select a broker or trading company. Through your broker you’ll have access to many markets you would not be able to access on your own, such as the securities industry.

The stock market will vary depending where you are; in the UK it is the London Stock Exchange. So how does the stock market work? It comes down to the most basic economic principles: supply and demand. The more demand there is for a stock, the higher its price will rise. So when traders discuss uncertainty caused by legal battles or other, wider issues affecting the price of shares on the stock market, what they mean is that these uncertainties are causing shareholders to sell their stock. This increases supply and so reduces the stock market price.

It is worth noting that the stock market operates as a kind of auction. Shares are always sold to the highest bidder. So how do you become a bidder? Depending what your preference is and what services your broker offers, you can access the stock market either over the Internet or over the phone. Simply place your order through your preferred means and your broker will purchase that stock for you. In today’s computerised world, the buying of shares on the stock market can be done within a minute.

With such ease of access to the stock market, it can be easy to get carried away. One of the most important steps any investor should make before acting on the stock market is evaluating how much risk they can handle and exactly what they wish to make from the stock market. As said at the start of this blog post, the sheer quantity of numbers coming out of the stock market can be overwhelming to say the least. It’s important to find a way to break down all the information so it is understandable and tailored to your needs. Good brokers will provide daily news updates and guidelines to help you get your head around the stock market and work out what news matters to you.

As the stock market does change so much it is important that, in the run-up to buying shares as well as during the period of holding shares, you check-in regularly with the latest activity. How has the price of shares fluctuated over a day or a week? Have there been any news stories coming out about the company that could cause uncertainty? Learning to read the stock market is often about reading all the factors that can affect supply and demand. So by evaluating uncertainties and how much influence they can pose to the stock market, you can get a clearer understanding of how the stock market works.

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