A stock market may be visualized as a massive public sale or auction where hundreds of people are engaged in the purchase and sale of paper pieces known as stocks. One flank of the stock market comprise proprietors of conglomerates seeking an opportune way to collect funds to enable them to appoint more employees, construct new offices and factories and modernize their equipment or machinery. These conglomerates or corporations collect funds by allotting shares of stock in their businesses. On the other flank of a share market there are people like you who purchase the shares of stock in these companies. And the place, usually a huge building, where all these people - the buyers and the sellers - meet is known as the stock market.
Although the term stock has been originally derived from the word livestock, today when we mention stock in a share market it no longer denotes livestock. Nevertheless, as a substitute for trading cows and sheep, now we buy and sell pieces of papers that symbolize ownership shares in a company or business. Often you will find people mentioning stocks as equities or securities. However, majority of the people simply call them stocks that denote supply. In any case, the complete stock market is established on the fiscal hypothesis of supply and demand.
Any person purchasing shares of stock in any business or firm is generally known as an investor or a shareholder of that particular corporation. Owning a share of stock of a particular company means that one is a part of the business' success and the shareholder actually become a partial owner of that corporation. At the same time, when a person purchases a stock of a company, he or she acquires one for every stock they own. Owning a greater number of shares of any business enables the investor to have more control in the running of the firm. In other words, the greater the number of shares owned, the more control exercised by the shareholder in the functioning of the corporation. Actually, majority of the investors possess only a minute slice of the business by owing a small number of stocks and enjoy very little control on the operation of the business. They also do not have the privilege or aptitude to be in charge of any person in the corporation. In order to become the most important owner of any business, an investor requires possessing millions of shares of a company whose shares are openly bought and sold in the stock market.
Summing up the discussion, it can be said that a conglomerate or business allots or circulates shares of stock with a view to attract the investors' money. On the other hand, the investors will only purchase stocks of a company if they are sure that they can make money by selling those stocks at a higher value later. Therefore, it is important to remember that the value of the stocks purchased by you will only go up if the company performs well. While this will enable to earn a profit by selling those stocks, if the company does not fare well, the value of the stocks will plunge. In such a situation no investor would be willing to purchase those stocks and you may have to suffer a loss if you desire to sell them.
A stock certificate is usually defined as a document that is a manifestation of lawful ownership of a specific number of stock shares in a corporation or business. In other words, stock certificates are a proof in black and white that you have endowed in a particular company or purchased its stocks. It must be mentioned here that there are several people who don't comprehend that they put in their money in companies or businesses and not in stocks. While some people solicit their stock certificates and want to keep them in a secure place, majority of the investors want their brokerage firms to retain their stock certificates. These investors find the latter method easier as the brokerage firm has to ensure the safety of the certificates. Technologically speaking, there are basically two types of stocks - common and preferred. The common stocks are the ones which most corporations directly issue to the shareholders. In fact, it is important to mention here that not all companies are entitled to issue stocks. In order to be eligible to issue stocks a company essentially needs to be a corporation, which is a lawfully described word. Actually, the majority of the prominent companies you know are all corporations and their stocks are bought and sold publicly in the stock market.
As investing in stocks is a profitable venture, we may well say that the stock market is a place where people go with the intention of making money. The modus operandi at the stock market is pretty uncomplicated. Investors purchase stocks issued by corporations that are running well and making profits - two essential aspects for the value of any stock to go up. When the value of the stocks owned by you goes up, you are able to sell them at a higher price fetching you significant financial gains. In the passing, it may be mentioned that the profits you earn from a stock are known as capital gains - the difference in the purchase and selling price of a stock. In case, you lose money by selling your stocks, the loss will be termed as capital loss.
Normally, an investor makes money in the stock market by purchasing a stock at a lower price and selling it at price that is higher than what he or she had paid to buy it. Although this may appear to be a very easy way of making money, there is actually no assurance that you will always make money by selling stocks owned by you. Irrespective of which corporation's stocks you may possess, there is always a possibility of suffering losses in stock trading. Remember, even the value of the stocks issued by profitable corporations may take a plunge at times. Usually, when people purchase stocks of corporations that are doing well and making profits, they can hope for making profits by selling the stocks when their prices go up. Unfortunately, it is not always that way for the price of the stocks of big and profitable companies may also go down. But this is a part of the game and you have to take this risk while investing in the stock market.
Talking about the history of the stock market, long ago when there was no place called the stock market, stock trading was done in the street. Stock buyers and seller assembled in a particular street and transacted business. Earliest records available in this regard mentions that the stock buyers and sellers met in the street under a buttonwood tree in New York each weekday for a while around 1790. It is a mere coincidence that the place these people met was a location on the Wall Street. For those who are more interested in history, the above mentioned buttonwood tree was located at 68, Wall Street in New York.
Gradually, the place began to attract people. Over a period of time, many people had come to know what was taking place on the Wall Street and desired to participate in the proceedings. As more and more people wanted a slice of the action that took place on the Wall Street, the pace of stock trading went up progressively. It is said that on particular days people traded around 100 or more shares of stock.
Even during the initial days of business at the Wall Street, the place was swarming with investors, brokers and corporations eager to buy and sell stocks respectively. The flurry of activity led the 24 merchants and brokers who operated there at that time took a decision to organize their activities for efficiency as well as orderliness. It was for the first time that these merchants and brokers arrived at a consensus to purchase and sell shares of stocks of different corporations in lieu of a set commission or fee. These people, now known as stock brokers, charged 25 per cent commission on every share of stock they bought or sold on behalf of the investors. In 1792, they signed a historic accord called the Buttonwood Agreement. In fact, the signing of the Buttonwood Agreement marked the modest establishment of the now world famous New York Stock Exchange (NYSE).
Soon after this, the brokers and merchants operating at the New York Stock Exchange shifted their offices from under the buttonwood tree to a coffee shop located on the Wall Street. Later, they finally permanently shifted indoors to the New York Stock Exchange Building situated on the Wall Street. Here, it is important to remember that a stock exchange is just a place visited by people to trade in stocks. Like a supermarket offers a market for food and other stuff, a stock exchange essentially provides a structured and controlled market for buying and selling stocks.
Today, over two centuries later, the term Wall Street continues to be an icon of all the stock exchanges in the United States as well as the financial institutions (FIs) that have business transactions with them. And irrespective of their physical locality, this stands true for all stock exchanges and FIs anywhere in the United States. If you visit the Wall Street for the first time, you will be amazed to find that it is a narrow avenue located in the financial district of Lower Manhattan. In fact, you may even find it difficult to believe that billions and trillions of dollars are transacted here in the form of stock trading on any working day. Hence, today the Wall Street actually manifests the stock market in such a manner that when ever you may be discussing the financial markets, a mere mention of the Wall Street would help anyone comprehend what you are talking about.
Following the establishment of the New York Stock Exchange, there were a number of brokers trading in stocks, but not regarded competent enough or capable of from the NYSE. However, stock merchants and brokers who were not considered to be good enough for the NYSE continued with their business at the street curb and were known as the curbside traders. In due course, these curbside traders also shifted to indoor offices and established an organization that later came to be known as the American Stock Exchange or the AMEX.
In addition to the New York Stock Exchange (NYSE) and the American Stock Exchange (AMEX), today there is a third important stock exchange in the United States called the National Association of Security Dealers Automated Quotation System or NASDAQ. The NASDAQ was established in 1971. It is important to note that the NASDAQ was the first electronic stock exchange that was connected collectively by an arrangement of computers.
The existence of three major stock exchanges has proved to be beneficial for the investors. In fact, competition is always healthy for the stock market as it compels the stock exchanges to fulfill the demands of the investors more quickly and also in a more inexpensive manner. In any case, the stock exchanges are in need of business from you and this is their sole source of sustenance. Today, stock exchanges exist in almost every part of the globe, but still the stock market in the United States is the biggest or prevalent. Apart from the three prominent stock exchanges - the New York Stock Exchange (NYSE), the American Stock Exchange (AMEX) and the National Association of Security Dealers Automated Quotation System (NASDAQ), the other stock exchanges in the United States comprise the Pacific Stock Exchange, the Cincinnati Stock Exchange, the Philadelphia Stock Exchange and the Boston Stock Exchange. In fact stock exchanges exist in almost all the countries, prominent among them are England, France, Switzerland, Germany, Sweden, Holland, Russia, Italy, India, China, Canada, Japan, Australia, Mexico, Brazil and so on.
With a view to compete more effectually against the New York Stock Exchange (NYSE), the American Stock Exchange (AMEX) and the National Association of Securities Dealers (NASAD) that owns the National Association of Security Dealers Automated Quotation System (NASDAQ) merged a few years back. Though the two stock exchanges still function independently, the unification of the two major stock exchanges permitted them to launch new investment schemes or plans together. While this development is really a fascinating occurrence in the stock market, it does not have any affect on the investor in any manner. In any case, in the end it does not matter from which stock exchange you purchase your shares of stock.
Each stock exchange has its own set of rules and regulations that often make it difficult for corporations to be listed on or associated with a stock exchange. In fact, often it takes several years for a corporation to fulfill the prerequisites for joining a stock exchange. Generally, the stock exchanges only list corporations that fulfill the objectives and values of any specific stock exchange. In other words, any corporation simply cannot join a stock exchange at its will, but has to meet several requirements set by the stock exchanges before they can be listed.
For instance, the New York Stock Exchange is very particular when it comes to listing corporations. Hence, almost all the firms that are listed on the NYSE are among the most familiar as well as largest corporations in the United States. These corporations are also known as blue-chip companies and some of them include Procter & Gamble, Wal-Mart, Coca-Cola and Johnson & Johnson. Then again, the National Association of Security Dealers Automated Quotation System (NASDAQ) mainly list corporations engaged in technology business. Some of the technology corporations listed on the NASDAQ includes Intel, Cisco Systems and Sun Microsystems. Moreover, the NASDAQ also contains stocks that are bought and sold 'over the counter' (OTC). It may be noted that more than 5000 stocks are traded on the three major stock exchanges in the United States, while stocks of an additional 5000 lesser important companies are exchanged over the counter.
Having issued its stocks to raise money and permit the stock to be exchanged publicly, the next important task of the corporations is to market their stocks effectively. In other words, the corporations persuade the people to purchase their stocks claiming that it would be profitable to own the stocks issued by the company. In fact, the corporations undertake all possible measures within their capacity to draw money from the public. These corporations will actually go to any extent to woo the investors to buy their stocks. While the larger and more influential corporations market their stocks by means of publishing advertisements in the print media or through the television, the relatively less significant corporations usually depend on the word of mouth campaigns, emails and press releases to woo the investors to buy their stocks. For the remaining part, the more the people are convinced about the profitability of the stocks of a particular corporation, more and more people will buy those stocks enabling the people on the Wall Street will make more money.
Usually, the investors purchase the stocks in corporation on which they have faith and having bought the stocks, intend to retain them for a considerable period - normally a year or more. It is also true that in general, the investors prefer to overlook the temporary every day variations in the value of the stocks in the market. And if every thing works in line with their plans, the investors find that the worth of their endowment in the stock market has enhanced after a while.
When Warren Buffett, who is considered being among the most profitable buy-and-hold contemporary investors, purchases stocks in a corporation, he prefers to describe it as buying a business and not merely purchasing shares. In fact, Warren Buffet purchases the stocks at the best price available to him and likes to retain them for as long as possible - if possible forever. Once when Buffet was asked as to when he sells his shares, his response was 'Never'.
It is important to mention here that Warren Buffet always purchases stocks in the traditional (according to some, 'boring') corporations such as insurance firms and banks. Buffet hardly ever purchases stocks in any technology corporation. And, most importantly, Buffet eventually became a billionaire utilizing his enduring buy-and-hold endowment policy. In fact, Warren Buffet's investment policy is a strategy that will even help you to decide on what stocks to buy and sell as well as when they should be bought and sold.
While investors purchasing stocks in a corporation are generally concerned about the long-term prospects of the company, the short-term traders do not have any long-standing expectation from a corporation. The primary objectives of the short-term traders are to make the most of the temporary fluctuations in the value of a particular stock or the variations in the stock market as a whole. In other words, this means that the short-term traders may purchase a stock and then sell it in five minutes, a few hours, a few days, a few weeks or a few months depending on their profitability. This is basically owing to the fact that when an individual is trading in stocks, he or he is more concerned about the value of a stock rather than the dealing of the corporation issuing the stock.
There are various kinds of short-term traders in the stock market. If you are aware of the term 'day trader', you must also be familiar with the fact that it denotes a very belligerent sort of short-term trader of stocks. For instance, a day trader will purchase a stock at a value of $10 per share with the intention of selling it at a marginal profit at $10.50 or $11 more often than not on the same day. On the other hand, if the value of the stock drops after the purchase, the day trader will try to dispose it off at the earliest at the least possible loss. To be precise, a day trader purchases a stock during the morning and usually sells it for a superior price later on the same day. It needs to be mentioned here that it is really hard to earn profits continuously working as a day trader and even if they make consistent profits, the margin is generally too negligible. This is the basic reason why only a handful of people make a living as a day trader.
Professional traders on the stock market are people who often utilize other people's money to invest or trade in stocks. Although at times they also spend their own money in stock trading, usually they work on behalf of other people, whom they call their clients. Even people who work for the Wall Street brokerage firms and stock exchanges are also called professional traders. However, professional traders also comprise people who are who work for various institutions such as the banks, pension funds and the mutual fund firms and, hence, are also known as institutional traders.
It is an accepted fact that institutional investors, or institutions engaged in stock trading, have millions of dollars at their disposal and are not only capable of influencing individual stocks, but also have a sway over the total stock market. With a view to facilitating the volumes of business they do, many of these institutional investors have computerized their operations. In fact, they in have installed such computer programs that the machines are robotically purchase and sell stocks when their prices have attained a particular or predetermined value. In order to protect the interest of the common investors, the every stock exchange has set individual limits on the volume of stocks the institutional investors are permitted to purchase or sell on days when the stock market goes up or down by several hundred points. In other words, the stock trading activity of the institutional investors is actually restrained on occasions when the market experiences great fluctuations.
If anyone desires to become a professional trader at the Wall Street, he or she may apply for a membership of any of the stock exchanges. Going by the prevailing prices, one would have to spend quite a few million dollars in order to procure a seat on the New York Stock Exchange (NYSE). In return, the individual will have the liberty to directly trade stocks on the floor of the exchange. (Incidentally, when you spend that amount of money, you may imagine that they would allow you to play golf. On the other hand, even spending a few million dollars less would enable you to directly trade in stocks sitting comfortably at your home!) It is interesting to note that there are quite a number of people who own seats in the NYSE, but actually do not trade in stocks themselves. Instead, they rent their seats to professional traders at a premium making some additional earnings.
The Wall Street keeps count of what is happening in the stock market through various means. The most straightforward and effortless way to keep track of things in the stock market is going through the financial section of the newspapers, watching television or surfing the Internet. However, normally people watch the Dow Jones Industrial Average (DnA), which is considered to be the most accepted technique of finding out whether the stock market is up or down on a particular day.
When a journalist called Charles Dow worked out the mean of the closing prices of 12 railroad stocks in 1884, the process was named the Dow Jones Transportation Average. The reporter's aim was to turn up a method to evaluate the way the stock market performed every day. In those days, Charles Dow wrote a commentary on the stock market in a four-page newspaper that was published daily and called 'flimsie'. Later, this daily newspaper came to be known as the renowned Wall Street Journal. After a few years, Charles Dow assisted in establishing Dow Jones that pioneered the Dow Jones Industrial Average. In its initial days, the Dow Jones Industrial Average comprised commentary on the performance of 12 industrial stocks.
If you are familiar with averages or arithmetic mean, you would be aware that all you need to do to find the daily average of the stocks is simply add the prices of the stocks mentioned in the index and then divide the total with the number of stocks. In fact, if you observe the Dow Jones Industrial Average, you will be able to determine how the stock market is performing. In other words the Dow will help you to have a genera idea regarding the functioning of the stock market on any given day. In addition, the Dow Jones Industrial Average also provides us with hints regarding the movement of the stock market - if it is going up, down or sideways. It may be mentioned here that the trend or leaning only refers to the direction of movement of a particular stock or the stock market in general.
The stocks those were initially included in the Dow Jones Industrial Average were the largest as well as the most renowned firms in the United States during the closing phase of the 19th century. The American Tobacco, U.S. Leather, Distilling and Cattle Feeding and the General Electric were four prominent companies among the 12 firms in the Dow then. Well, there are no prizes for guessing the name of the company whose stocks are still included in the index - it is General Electric. None of the other 11 corporations have their existence today as they have either downed shutters or merged with different corporations.
The number of stocks in the initial Dow Jones Industrial Average went up from a mere 12 to 30 by 1928 and the number of stocks in the index remains the same till this day. Hence, the index is also often known as the Dow 30. In fact, the 30 stocks included in the index comprise a range of the most essential segments in the stock market. It may be mentioned here that each sector in the stock market comprise a group of firms or companies in the same industry, for instance energy, technology, utilities and so on.
In due course, the Dow Jones Industrial Average transformed from an equal-weighted index (a method whereby the smallest companies are given equal weight to the largest companies in an equal-weight index fund or portfolio) to a system where dissimilar stocks have unlike weights. This denotes that in comparison to the stocks having a lesser weighting, the stocks that with a higher weighting have an effect on the Dow index. For instance, if stocks like the American Express that presently has a higher weighting in the stock market drops by quite a lot of point and has a bad day on a particular occasion, the Dow Jones Industrial Average will eventually end that day with a down. It is basically very simple to learn how the Dow Jones Industrial Average performs every day as it is reported in the media daily. As more than 50 per cent of the country's population has invested in the stock market, there is plenty of interest among the public regarding the performance of the Dow each day.
Hence, when we say that the Dow Jones Industrial Average is up or down on a particular day, we do not talk about a single stock, but refer to a typical group of 30 stocks or the Dow 30. As a consequence, even if the stock market is low on a particular day, the value of the stock owned by you may be up. On the other hand, if the market is up on any occasion, it does not essentially mean that they stock you own too would be up.
While the Dow Jones Industrial Average, run by the Wall Street Journal, established the first ever index that pioneered the process of keeping count of what is happening in the stock market, over the years several other indexes came into existence. These indexes keep track of nearly everything happening in the stock market and all sectors - from utilities to technology to transportations stocks. While the majority of the stock market investors follow only three major indexes, more erudite investors observe a number of of these new indexes as well.
After the Dow Jones Industrial Average, the NASDAQ Composite Index is considered to be the next most accepted index of the stock market. While the Dow index includes only 30 stocks, the NASDAQ Composite Index follows over 5000 stocks, mostly technology, that are listed on the NASDAQ. In fact, the NASDAQ Composite Index is so popular that whenever you come across the Dow listed stocks on television or on the Internet; you will definitely find NASDAQ just beneath it.
The third most popular index that people observe intimately is the S&P 500. As the name of the index suggest, this index includes as many as 500 stocks. In fact, the 500 stocks included in the S&P 500 index actually embody the number of stocks that the Standard & Poor's Corporation (S&P) has selected to represent the stock market in general. Besides being the biggest stocks in the market, many of the stocks in the S&P 500 are actually technology stocks. The Russell 2000 index and the Wilshire 5000 are also among the most popular stock market indexes followed by the investors on a regular basis.
The primary objective for any professional money manager is to get the better of the key indexes every year. If you are confused over the above mentioned statement, let us tell you that this means that in the event the Dow Jones Industrial Average is upbeat by 15 per cent in a particular year, the professional money manager's endeavor or goal would be to achieve at least 15 per cent or much above. However, the fact remains that it is very difficult for anyone, even the professional money managers and professional investors, to perform better than the indexes. According to a report in 2001, more than 50 per cent of the professional money managers had failed to go one better than the indexes every year. Again, it was reported that only 37 per cent of the professional money managers or professional investors had succeeded in outclassing the indexes in 2002.
It is a fact that numerous people come to the stock market with no obvious inkling of the hazards involved with investing in stocks. Speaking philosophically, most of the people venturing out in stock investment look up at the stars, ignoring the rocks below their feet! In fact, investing in the stock market is something akin to gambling. Coming to the point, there is a great possibility of losing a quantity of or your entire money the moment you decide to endow or trade in the stock market. What is worse is that there is enough probability of the fact that you may even end up losing more money than what you had actually invested in the stock market. Hence, it is essential that the aim of each and every person desiring to invest or trade in the stock market should be to learn how to identify the hazards and risks associated with stock trading and take necessary measures to diminish them. It is important to always remember that while investing in the stock market, it is virtually impossible to completely do away with the risks involved, but it is definitely possible to minimize them. And you can always gain the knowledge to tackle the problem.
When you invest in the stock market, you are confronted with different sorts of risks. First and foremost, the stock market as a whole may plunge vis-à-vis the price owing to external happenings, such as wars, economic slump or even terrorism. Next, as discussed above, even if the stock market escalates, the value of the stock you own may plunge for several reasons. Thirdly, even if you decide not to invest in the stock market and put your money in your bank savings account or, for that matter, keep it under the mattress, there is no guarantee that you will not suffer a loss. In the event of inflation, the value of your money is bound to fall, irrespective of where you invest or store it. Last, but not the least, if you choose not to invest your money in the stock market, there is always a possibility that you will fail to benefit from making some prospects of making good money with your surplus cash.
Hence, the final word is that whether or not you invest your surplus money in the stock market, you will always be confronted with risks. There is no guarantee that your money will earn you profits or retain its value, even if you choose to avoid the stock market.