Friday, April 30, 2010

The Way Stock Market Works With Stocks


The stock market is a place which facilitates the exchange of goods between interested parties. Exchange of stocks start when a company (a corporation at that because single proprietorship or partnership business are not allowed), wants more money for its business. It has to get money somewhere and the option is to borrow money or sell stocks. Borrowing money shall put it to debt so it could choose to sell stocks. Selling stocks means it sells part ownership of its company. Stock owners long ago realized that it would be more convenient if there were a common place where they could go to trade (or buy and sell) stocks with one another. So, the stock exchange was born. From this stock exchange, grew today’s stock market.

Trading of stocks

Selling and buying of stock works this way. Let’s just say, you open an account with Trade E. You send Trade E a check of $1k. Trade E deposits the check into a trading account that is listed in your name. You log onto Trade E and place an order to buy 100 shares of a stock in Company A, which is trading at $5. Trade E now tells its network that there is a demand of 100 shares of Company A. If one of his networks finds someone who is willing to sell 100 shares of Company A, they execute the trading of stock between you and the person selling the shares. The stock market trade information is brought to a clearinghouse where the information is processed and the shares will now be registered to you. The clearinghouse will designate 100 shares of Company A to Trade E and Trade E will designate those 100 shares or stocks as yours.

Public market

The stock market works depending on its organization and government regulation. There are stock exchange corporations which are non-profits. There are also for-profit businesses. These for-profit companies earn money by providing trading services. When a company goes public, it has the opportunity for additional funds since investors can purchase its shares. But it is exposed to stricter regulatory control by government regulators. When a company goes public or wants to participate in stock market by selling stocks for the first time, it has to file necessary paper works with the government and the exchange it has chosen, it makes an Initial Public Offering (IPO). The company will decide how many shares to issue on the public market and the price it wants to sell them for.

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