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The Stock Market

What It Is and What Makes It Move

The first question that comes to mind is “What is the stock market?” The stock market refers to the trade of shares issued publicly by corporations, of which investors purchase pieces of that corporation to finance development of said company in return for a portion of the company's profits. Shareholders actually own a piece of the corporation. The trading of stocks happens in the stock exchanges, three of which are located in the United States and quite a few others internationally.

So how does it all work? Let us take the Dow Jones Industrial average, which is a group of 30 major stocks assigned an average on a daily basis. The average climbs higher as the prices increase. However, the average declines, if those stocks lose value. There are two types of markets, one called the bull market, and one called a bear market. When market trends consistently increase, this refers to as a bull market. When market trends decrease consistently, this refers to a bear market.

Now that you have gained some know on the measurement of the market, let us dig a little deeper. How does someone make money in the stock market? The stock market offers two types of profits realize by investors. One refers to total return on an investment and classifies as income, plus the gains or losses.

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The other refers to Yield or the amount of dividends and interest remitted on such investments. Every investment entails risk, meaning an investor may loss the cash put up if the investment does not perform well. Typically the higher the speculated return, the more risk involved. Terminology at times can be confounding, however the fundamental are rather simple. You can either purchase an investment or lend funds to an organization with a payback agreement, including interest, over a specific period. You have the option of either investing or loaning your cash reserves when it comes to the stock market.

When you invest cash in the stock marketing, you are purchasing a portion of a company anticipating that company to grow returning you some of its profits. While most individuals consider the stock market as investments, it is just one of many investment opportunities. Stocks are simply ownership of a corporation. As you increase your share of stock in an organization, the more of that company you own, make you a shareholder. When we talk about the Stock Market, that really is all there is too it. However, selecting the right stock that will profit, that is where it gets complicated.

Stock Market Terms and Dynamics

  • Market Indexes
  • There are many indexes of various market segments consisting of the weighted price of a selected group of stocks meant to reflect the variations of the selected business sector.

  • Initial Public Offerings
  • The issuance of company shares to be openly traded on the markets of a previously privately held company.

  • Derivative Instruments
  • Trading Instruments whereby the value is based on the underlying stock prices. Examples are stock options, equity swaps, individual stock futures, Exchange Traded Funds, stock indexes and index futures. Stock Market Bids for shares

  • Valuations of a Stock
  • There are a number of methods to establish stock value including fundamental analysis based on financial statements and company performance and technical analysis which evaluates price dynamics looking for future market price trends.

  • Leveraging
  • The trading if stock that the trader does not own using strategies like selling short, buying on margin, or certain derivatives that can allow for control of much larger amounts of stock shares than if directly purchased.

  • Selling Short
  • Where one borrows stock and sells it with the expectation that the price will go down. At some future point the stock must be purchased, if the price is lower then the trader makes a profit, if it is higher he looses money.

  • Buying on Margin
  • The trader borrows the funds to purchase stock with the expectation that it will increase in value, the lender is normally the brokerage house.