Stock Market: Definition and How It Works

what is the stock market

The point of the stock market is to provide a place where anyone can buy and sell fractional ownership in a publicly traded company. It distributes control of some of the world’s largest companies among hundreds of millions of individual investors. And the buying and selling decisions of those investors determine the what is the stock market value of those companies. When private companies decide to sell shares of stock to the general public, they conduct an initial public offering. When you read that a company is “going public,” that means they are conducting an IPO where they make shares available for purchase by investors via public stock markets.

Today, there are many stock exchanges in the U.S. and throughout the world, many of which are linked together electronically. Investors make money in the stock market by exchanging their money for shares. Companies then put that money to work growing and expanding their businesses, and investors reap the benefits as their shares of stock become more valuable over time, leading to capital gains. As profits grow, companies also pay dividends to their shareholders.

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Not only can a robo-advisor select your investments, but many will also optimize your tax efficiency and make changes over time automatically. While the worst year for a 100 percent stock portfolio was a 43.1 percent loss, that understates the way a loss feels. That figure comes from the loss from Jan. 1 to Dec. 31, not the peak-to-trough, which is the percentage decline from the fund’s highest net asset value (peak) to the lowest net asset value (trough) after the peak. It was even worse if you extend the period to the bear market bottom in March 2009 (-52.9 percent). Basically, in a nasty bear market, you should expect to lose about 50 percent of the value of whatever portion of your portfolio you invested in risky assets such as stocks. Before your start buying shares you need to ask yourself how long is it going to be before you need your money.

The secondary purpose the stock market serves is to give investors – those who purchase stocks – the opportunity to share in the profits of publicly-traded companies. Some stocks pay regular dividends (a given amount of money per share of stock someone owns). The other way investors can profit from buying stocks is by selling their stock for a profit if the stock price increases from their purchase price. The stock market refers to public markets that exist for issuing, buying, and selling stocks that trade on a stock exchange or over-the-counter.

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For example one person might want to have more international stocks while another might want to have more tech stocks in their portfolio. It consists of aerospace, defence, manufacturing, construction and airlines. Usually this sector provides a very big % of a country’s GDP and you can see a lot of big companies here. Because of how big it is it is not a bad idea to diversify within the sector and hold more than one company from it. Also smaller companies tend to be more volatile, so if you don’t like big swings in your portfolio you might want to stay away from them.

what is the stock market