How Does the Stock Market Work?

Learn about stock trading as an investing option.

Many of the businesses you interact with on a daily basis are private companies owned by one or a few people. As companies get larger, however, some choose to offer ownership to the public as a way to raise money to further the company’s expansion. Even though you might only own a small fraction of the company, investing in stocks can be a good way to put your money to work for you. But, it can be risky: If the company goes out of business or there is a stock market crash, you could lose your entire investment.

Keep reading to find out what first-time investors need to know about the stock market.

How Stocks Are Priced

Each share, or stock, represents a fraction of ownership in a company. For example, if a company has 1 million shares outstanding, you would need to own 10,000 shares just to own 1 percent of the company.

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The price someone is willing to pay for an ownership interest in the company depends on how profitable people think the company will be in the future. If news comes out that makes people think the company will make more money in the future, the price usually goes up, whereas news that makes the company appear to be less profitable going forward can cause a price decline. Headlines can be either specific to the company, such as news that a new product is either a success or failure, or about the market in general.

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Buying and Selling Shares

Several different stock exchanges provide a market for people to buy and sell shares, including the New York Stock Exchange and Nasdaq. Sellers list shares they want to sell at the ask price, and buyers list stocks they want to buy at the bid price.

When a buyer agrees to pay the ask price or a seller agrees to sell for the bid price, a transaction occurs. Often, investors place orders with their stock broker or place orders to buy stocks online through online trading.

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How to Make Money in the Stock Market

You can potentially make money in two ways when buying publicly traded companies. First, if the price goes up, you can sell your shares at the higher price to lock in your gains. But, once you sell, you won’t profit any further. For example, if you purchase a stock for $50 and the price increases to $60, you can sell your shares and make a $10 profit per share.

Second, there are some stocks that make dividend payments to shareholders. Dividends represent the company paying out some of its profits, with stockholders receiving a specified amount for each share they own. Some companies pay dividends at specified intervals, such as quarterly or annual dividends, whereas others pay special dividends. For example, if you own 10 shares of a company that pays a $1-per-share dividend, you receive a check for $10.

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    About the Author

    Michael Keenan is a writer based in the Kansas City area, specializing in personal finance, taxation, and business topics. He has been writing since 2009 and has been published by Quicken, TurboTax and The Motley Fool.