Financial Planning

How Does the Stock Market Work?

By understanding how the stock market works, you can make better investment decisions. An easy way to understand the stock market is to know why it exists, who it serves, and how it works.

Why should you learn about the stock market? Because having a better understanding of the stock market and how it works can help you make better investment decisions. Fortunately, learning about the stock market can be a simple process, and with a little education, you can begin to understand the concept of stock investing.

An easy way to understand the stock market is to get a glimpse of why it exists, who it serves, and how it works. The following guide will give you the basics for a better understanding of the stock market - in easy, everyday language.

Protective Life Insurance Company does not recommend or endorse any particular investment option, and does not provide investment advice. Neither Protective Life nor its representatives offer legal or tax advice. Purchasers should consult their financial advisor, attorney or tax advisor as needed regarding their individual situation.

Why do we need the stock market?

For example, let's say you just started a new company and needed money to expand. Typically you'd have only two ways to raise money to cover startup costs or to expand the business. You could take out a loan, but that accrues interest. Another option would be to find investors who would give you money in exchange for a share of the ownership in your company. Why would anyone want to give money to a new business? Because if they think you have a good idea and that your business may be profitable, they're expecting to see a better-than-average return on their investment. That makes you a good risk.

But where do you find investors? And where do investors go to shop for companies in which to buy shares?

This is where the stock market comes in.

Where do you find investors?

Investors can be found just about anywhere: online, in a newspaper, or by asking family and friends. But what if your business isn't doing as well as you anticipated? Not only would this make it difficult for you to find investors, but make it harder for current investors to sell their shares of stock. The truth is at any time, some or even all of your investors may decide to sell their shares of stock. But to do this, they would need to find a buyer. And for a company that isn't performing well, this can be a big problem.

Enter the stock exchange “supermarket”

The New York Stock Exchange (NYSE) solves this problem by giving investors a convenient, one-stop place to buy and sell shares of stock. The NYSE can be thought of as a “supermarket” where everyone who wants to buy and sell shares of stocks can go. In the United States there are also two other stock exchanges: the American Stock Exchange (AMEX) and the National Association of Securities Dealers Automated Quotations (NASDAQ).

Today's stock exchanges make buying and selling easy and don't require having to purchase a plane ticket. Either you can contact a stockbroker who does business with one of the exchanges or you can buy and sell stocks online (typically for a fee). If these exchanges didn't exist, buying and selling stock would be much more complicated. Just think about having to place ads for buyers, waiting, and then negotiating on a price every time you wanted to sell stock. With the stock exchange, you can buy and sell shares instantly.

Getting more information

Sure, the stock market can be intimidating. But a little information and research can go a long way to help ease your fears. If you have questions regarding investing in the stock market, be sure to work with a qualified, licensed investment advisor.

For more information on money management, visit our learning center.

Was this article helpful?
64
58

This article is a high-level summary of things to consider when purchasing life insurance. The information presented is for information and educational purposes and meant to supplement other information specific to your situation. It is not intended as investment advice and does not necessarily represent the opinion of Protective or its subsidiaries.

Neither Protective life nor its representatives offer legal or tax advice. We encourage you to consult with your financial adviser and legal or tax adviser regarding your individual situations before making investment, social security, retirement planning, and tax-related decisions. For information about Protective life and its products and services, visit www.protective.com.

Stock Market

The stock market can be intimidating for beginning investors wanting to get started. This article explains the fundamentals of how the stock market works as you begin considering potential investment options. For more information, visit our learning center.

WEB.1238.10.14