How does the stock market work?


Quick Answer

The stock market is a market where an investor can buy or sell shares. Companies that want their shares to be traded by the public usually list them on a stock exchange, such as the New York Stock Exchange. To trade in stocks listed on a stock exchange, an investor must open an account with a brokerage firm, which acts as his agent.

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Full Answer

The price of a stock is typically driven by the law of supply and demand. If the number of buyers of a stock is greater than the number of those willing to sell, the stock price rises, while the opposite is also true. Basic stock market theory states that the price movements of a stock should be determined by a company's profitability. However, in practice, the price of stock is largely determined by what investors expect of the company's profitability in the future.

An investor typically wants to buy a stock at a lower price in the hope that the price increases so that he can sell the stock. This explains why in some cases, a company's stock increases before its earnings announcement, then decreases after reporting positive earnings. This happens because some investors start selling their shares believing that its price has temporarily peaked.

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