Stock Market Game
Business is the cornerstone of every economy. Almost every large business started out as a small and became financial giants through growth. When a business is growing, the biggest obstacle is frequently raising sufficient money to expand. They generally have two options either sell part of the business to investors, or borrow the money from a venture capitalist or bank and use that money for fund growth. These provoke small business owners to issue stock.
The stock market can be a great source of confusion for many people. Some people think that investing is a form of gambling; they are certain that if you invest, then you will end up losing your money. However, this feeling is not ground in facts. If someone is thinking like that, then he simply does not understand why the stock market exists and what the stock market is.
How Stock Market Works
Stock Market works in a way similar to any other market. There are sellers and buyers. The sellers know how much they want to sell for and the buyers know how much they are ready to pay. The sellers list their prices called as ‘ask’ and the buyers make an offer called as ‘bid’.
The stock market is determined by fundamental of global growth, economic and financial for the long-term investment. However, in the short-term investment, the market is driven by simple fears and greed, which are uttered by human feelings. During bad economic times, low consumer confidence, and political uncertainty, the stock market often performs worse than underlying earnings. However, during times of affluence, the stock market often rises faster than the underlying fundamental predict.
The main players in the stock market are the exchanges. A stock exchange is an entity which provides trading facilities for traders and stock brokers, to trade stocks and other securities. It also provides facilities for the redemption and issue of securities as well as capital events and other financial instruments, including the payment of dividends and income. The primary exchanges are the New York Stock Exchange (NYSE), the NASDAQ (National Association of Securities Dealers Automated Quotations), all the ECNs (Electronic Communication Networks) and a few regional exchanges like the Pacific Stock Exchange and the American Stock Exchange.
Here is an example –
- You open an account with some trading software, suppose StockMarket. You send StockMarket a check for $2,000, and they deposit the check into your trading account.
- You log onto StockMarket with the username and password provided by the company, and place an order to buy 50 shares of a stock in Company X, which is presently trading at $10.
- StockMarket uses its network to notify the NASDAQ and all of its related networks that there is demand for 50 shares of Company X's stock.
- The NASDAQ finds a person who is ready to sell 50 shares of Company X, and then immediately they carry out the trading of stock between you and the person selling the shares.
- This trade information is sent to a clearinghouse where the information is processed and the shares will now be registered to you.
How Stocks are Valued (Stock Valuation)
Stock Valuation is a method of calculating theoretical values of companies and their stocks. Stocks have two types of valuations.
- One is a value dictated by how much investors are ready to sell a stock for and by how much an investor is ready to pay for a share of stock. This valuation is based on supply and demand. If more people want to sell the share (stock), then the price of share decreases. On the other hand, if more people want to buy the share, then the price of share increases. This type of valuation is very hard to predict or understand, and frequently drive the short-term stock market trends.
- The other value is created using some type of fundamental earnings, sales or cash flow analysis. This type of valuation is based on historical statistics and ratios, and it tries to allot value to a stock based on computable attributes. This valuation is used by the people to justify the stocks. It drives the long-term stock market trends.
How to Invest in the Stock Market
- Don’t try to time the market.
- Use cost averaging.
- Take taxes into account.
- Invest as much as possible into tax-sheltered IRAs, 403B and 401K.
- Diversify your investments and mutual funds.