How a Stock Market Works

By Douglas Gerlach (past articles)
ShareBuilder

11/29/2005

Become a Fan of Young Money

Follow Young Money on Twitter

Email This Article

Print This Article

The stock market might seem mysterious, but its inner workings are no big secret. Have you ever attended an auction? When you buy an object at auction, you aren't buying from the auctioneer. It's the auctioneer's job to match buyers with sellers, and to get the best price possible for the seller.

Since there's no fixed price for any auction item, the selling price is set by the amount that a buyer is willing to pay. The stock market works in a somewhat similar fashion. It's an auction-based market, with intermediaries who match buyers and sellers of stocks.

Once a stock has gone public, its shares are bought and sold on organized stock markets. The largest public stock market is the New York Stock Exchange, also known as "the Big Board." The NYSE is home to many of the largest and best-known American companies, and is probably what you picture when you think about a "stock market" - lots of people running around in funny-colored jackets, gesticulating wildly with their hands, scribbling orders on notepads. These are the specialists, and it's their job to match buyers and sellers of a particular stock.

Behind the frenzied spectacle is a methodical and organized system of trading, in which the price of any stock is set purely by rule of supply and demand in an auction setting. Specialists help match buyers and sellers, but shares are always sold to the highest bidder.

Every day, you can tune in to your TV to see reports from the floor of the New York Stock Exchange, or to see the ringing of the bell to signal the beginning and end of the trading day. But the NYSE isn't the only market for stocks. The American Stock Exchange operates in a similar fashion, and there are many smaller regional stock exchanges, such as the Pacific in Los Angeles, the Philadelphia, the Boston, the Cincinnati, and the Chicago. Some small companies are listed only on a regional exchange, while some NYSE and AMEX companies are listed on these smaller exchanges, as well, for greater exposure to investors.

The Nasdaq stock market differs from the Amex and the NYSE in that it's a completely electronic system. All trades for Nasdaq stocks are done via an extensive computerized network between geographically dispersed investment banks and brokerage firms. Some serve as market makers for Nasdaq-listed stocks, maintaining inventories of selected stocks so that investors can always find shares to buy or sell. (The NYSE and the Amex are also both putting technology to work in matching trades electronically, bypassing the human specialists.)

Fortunately for you, all of this activity goes on behind the scenes. All you have to do is log in to your ShareBuilder account, and click the Buy or Sell button to make a trade. All of these markets operate under sophisticated rules that are designed to protect investors, but they share a single objective - to allow investors to get the best possible prices on shares of stock, whether they're buying or selling.

Share This Page

Comments

Submitted by PWess on 10/19/2008

If stock prices are determined purely by supply and demand, how come stock markets in Australia can open weaker when the Dow has dropped - and before any trading has commenced that day ?

Submitted by thank you buddy on 01/28/2009

Thanq very much dude.

Submitted by PWilliam on 03/13/2009

Very Helpful

Submitted by Mr. Anonymous on 05/08/2009

outstanding article!

Submitted by gbart8717 on 06/01/2009

Although your article did not state anything I did not already know, I thank you for it.