By: Paalvi Tadwalkar
“Successful investing takes time, discipline and patience. No matter how great the talent or effort, some things just take time: You can’t produce a baby in one month by getting nine women pregnant” stated Warren Buffet, the father of investing. Making good investing decisions is certainly not easy and requires thorough research about businesses, and most importantly, extensive knowledge of the stock market. With that being said, what is the stock market? And more importantly, how does it really work?
The stock market is a multitude of stock exchanges where buyers and sellers come together to exchange equity shares of various public corporations. A subset of a stock market is known as a stock exchange, and the leading stock exchanges in the United States are the New York Stock Exchange (NYSE) and the National Association of Securities Dealers Automated Quotations (NASDAQ).
Stock markets are especially important in a free market economy as they permit democratized access to trading as well as exchange to a variety of investors. They are essential in markets as they ensure efficient dealing and assure a fair price and high levels of liquidity to competing buyers and sellers.
More often than not, investors tend to base their decisions on market conditions. When stock prices are on the rise, consumer confidence increases greatly. This occurrence is known as a bull market, and is usually seen when there are high employment rates and flourishing economies. This creates a buyers market which attracts investors and motivates them to purchase shares. The best way to maximize returns in a bull market is to have a higher allocation of stocks.
However, bull markets do not last forever. Recessions and slowdowns occur in economies from time to time. During such times, stock prices decline and consumer confidence declines. This market condition is known as a bear market, and is usually seen when there are higher rates of unemployment and declines in gross domestic product (GDP). At such times, investors do not want to buy into the market as they fear losses. Instead, they take this opportunity to sell for cash and free income security. This results in a sellers market.
Depending on market situations, investors can execute a variety of orders which enable them to buy and/or sell a security. The most simple of these orders is a market order, in which investors can buy and sell stocks immediately. More advanced orders include limit orders which determine a price at which the order goes through. Though, if this limit is too high or low, the order may not go through. Stop orders are another kind of order which ensure stable profits and protect investors from major losses.
The stock market is a mechanism which requires understanding to truly engage in trade. As Charlie Mungner said, if it (investing) weren’t a little difficult, everybody would be rich. Thorough knowledge of the stock market will make money work for you, not the other way around.” With that being said, happy investing!
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