Monthly Archives: January 2015

How Does the Stock Market Work

Stock Market 101:

If you wonder how does the stock market work, first think of all the national brand names that you’re already familiar with.

From banks to tech giants to the familiar names you see at malls, many of these corporate entities trade on the stock market. Anyone who has at least a few thousand dollars can open a brokerage account and invest in shares of stock issued by these companies. The goal is to buy and sell shares in these securities and then profit from price fluctuations.

Learning Stock Market Vocabulary

There are many terms to learn before you make your first trade. Here are just some of the most essential terms to understand right away.

  • Ask – the seller’s asking price for a security
  • Bid – the buyer’s offering price for a security
  • Commission – the fee a broker charges for each trade
  • Day Trade – to enter and exit a trade in one session
  • ETF – an Exchange Traded Fund, which can reflect an entire industry sector or group of stocks
  • Limit Order – an order that can only be executed at a specific or better price
  • Market Order – an order that executes at the current market price
  • Short – the technique of selling shares first then covering (buying) them at a lower price
  • Spread – the range between bid and ask prices
  • Stop Loss – a technique for exiting a decliner before losing too much money
  • Volume – the amount of shares being traded either in a security or the overall market

Understanding the Market

The phrase “the market” on financial shows refers to the overall stock market, but it can also sometimes refer to the top Wall Street firms, which are responsible for a high percentage of trades. The leading trading institutions are Goldman Sachs, JP Morgan Chase and Morgan Stanley.

There are hundreds of other smaller financial firms that are considered to be part of Wall Street. It’s helpful to understand that the largest trading firms use the fastest trading software. How does the stock market work? Millions of trades by these big firms and the broader market of investors move prices up, down and sideways.

Stock Price Movement

Not all stocks behave the same way. Some stocks move with the overall market while others are affected by company news, such as earnings reports. The price at which the first trade is executed during any given session is called the opening price. The final trade of the session accounts for the closing price.

The regular weekday session opens at 9:30 am ET and closes at 4 pm ET. Usually the first hour of trading is when many day traders capitalize on the biggest price fluctuations. The final hour of trading typically leads to another surge in volume spearheaded by financial firms. Day traders tend to favor high volume stocks since low volume stocks are less liquid, which can trap you in a position.

Trading strategies are not so much based on hope as they are on an “if then” principle. For example, if the price does what you expect then you hold or take profits, whereas if it doesn’t do what you want then you limit your loss.

Further Trading Knowledge

If you’re still asking yourself how does the stock market work, you can turn to professional traders for help. The reason successful trader Markus Heitkoetter, a former IBM director, created Rockwell Trading in 2005 was to simplify trading and help traders realize their goals. The company helps educate both beginning and experienced traders with valuable tips. Heitkoetter’s trading systems can be easily integrated with other trading systems, in which there are hundreds on the market.