Supply and demand are the main components of the stock
market. Supply is considered as the number of shares of stock and demand is the
number of shares that investors want to buy.
For the for every share that is purchased, it's important to
understand that there is someone on the other end selling that share (or vice
versa). The stock market is actually just a big, automated superstore where
everyone goes to buy and sell their stock. Exchanges are the main players of
the stock market.
Stock Exchanges
Stock Exchanges are where the sellers are matched with
buyers to both make possible trading and to help set the price of the shares.
The primary exchanges are
- The
NASDAQ
- The New
York Stock Exchange (NYSE)
- All of
the ECNs (electronic communication networks) and
- A few
other regional exchanges like the American Stock Exchange and the Pacific
Stock Exchange.
All of the trading was done through the traditional stock exchanges
(like the NYSE, American and Pacific Exchanges) in the past, but now to facilitate
trading, majority of the trading is done through the NASDAQ, which uses ECNs
and thousands of other firms with access to the NASDAQ.
An individual investor requires a broker to make
transactions for him. To buy or sell a certain stock, Stock Brokers take
orders. The order may comprise instructions to trade at a certain price or
simply what the market will bear.
The stock broker attempts to execute the
order the moment he receives it. A broker also represents the buyer or seller
and on the sale, each broker receives a commission.
How stocks are valued?
Two types of valuations are there for stocks. One is a value
created using some type of cash flow, sales or fundamental earnings analysis.
Depending on how much an investor is willing to pay for a
particular share of stock and by how much other investors are willing to sell a
stock for (in other words, by supply and demand), the other value is dictated.
Over time, as investors change the way they analyze stocks, and
as they become more or less confident in the future of stocks, both of these
values change.
The fundamental valuation is the valuation that people use
to justify stock prices. The P/E ration, which stands for Price to Earnings Ratio,
is the most common example of this type of valuation methodology.
Based on
historic ratios and statistics, this form of valuation aims to assign value to
a stock based on measurable attributes. This form of valuation is typically
what drives long-term stock prices.
Supply and demand is the other way stocks are valued. The
more people that want to buy the stock, the higher its price will be.
On the
contrary, the more people that want to sell the stock, the lower the price will
be. This form of valuation is very hard to identify with or predict, and is
often drives the short-term stock market trends.
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