The stock market is an important part of the economy. You can trace the rise and fall of corporate empires as their values swell and sink in a moment. But when looking at the stock market, many people don’t realize that it has a huge impact on their finances, even if they don’t buy and sell stock on a regular basis.
Stock Makes Up Mutual Funds and Retirement Account
If you have a 401(k) at work, which most Americans who work for large companies do in some form or another, you are typically offered a list of investment options when you sign up. Those options are mutual funds, a pool of money from lots of individuals used to buy large blocks of stock, bonds, and other assets.
A huge number of mutual funds invest in S&P 500 companies like Apple, 3M, Microsoft, Procter & Gamble, and 496 more. Some of the biggest mutual funds track large indexes like the S&P 500, Dow Jones Industrial Average, and industries and foreign markets. What lies behind those indexes? Stocks!
If you own a mutual fund or invest through a 401(k), you are investing in the stock market!
Stock Prices are the Price per Share of the Most Recent Trade
In every stock transaction, there is a buyer and a seller. If both are not present and willing to agree on a price per share, the trade doesn’t happen.
For example, let’s say Starbucks stock is listed at $57.54 per share. That is the price of the last trade. Let’s assume someone wants to sell the stock at $57.55 per share, but the highest buyer wants to pay $57.51. In that scenario, the stock will not trade, and the price will remain listed as the most recent trade price, $57.54. The difference between the bid price (offer to buy) and the ask price (offer to sell) is called the bid-ask spread.
But then big news breaks that people are drinking more coffee than ever before. Now someone is willing to pay whatever the market is asking per share and enters a buy order with their broker. Because there are shares listed with a sell order at $57.55 per share, the new buyer will get those shares at $57.55, which is the new share price. The buyer with a limit order at $57.51 didn’t get to buy the shares, as that was never the market price.
Trades are Primarily Made by Computers Now
If you watched old stock market movies in the 80s or earlier, the stock market was depicted as a raucous, noisy, high energy trading floor where people would shout buy and sell orders looking to land the next trade.
While that is how things used to be, I hate to be the bearer of bad news, it doesn’t really work that way anymore. Now, most trades are entered into computers by customers like you and me through our stock broker’s website, by a professional investor looking to buy or sell a giant lot of shares, or by automated trading computers using algorithms to try to time the market for a profit.
The trading floor is pretty boring these days. There are still traders who work at the New York Stock Exchange, but the hustle bustle and colored jackets are mostly a thing of the past.
Learn Everything a Beginner (or Expert) Needs to Know about the Stock Market
This article is just skimming the surface of important stock market topics. If you really want to understand how stock trades work and what stocks represent, I wrote a detailed article explaining exactly how the stock market works.
If you want to be the next savvy trader, make sure you understand the basics laid out at the complete beginner guide to the stock market. Who knows where you’ll end up next?