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You help me make it look so easy. Select another language:. Please enter your email address: Subscribe. Discuss these How Does it Work definitions with the community: 0 Comments. Notify me of new comments via email. Cancel Report. Create a new account. Log In. Powered by CITE. Are we missing a good definition for How Does it Work?
Don't keep it to yourself Submit Definition. The ASL fingerspelling provided here is most commonly used for proper names of people and places; it is also used in some languages for concepts for which no sign is available at that moment. There are obviously specific signs for many words available in sign language that are more appropriate for daily usage.
Some Starfish Have Up to 40 Arms! Plus 10 Other Starfish Facts. What Are the Three Branches of U. Remember Missing Soldiers. What's the Fastest Car in the World? Stop Hand-washing Your Dishes! The dishwasher uses much less water and energy than washing by hand. The prices of shares on a stock market can be set in a number of ways. The most common way is through an auction process where buyers and sellers place bids and offers to buy or sell.
A bid is the price at which somebody wishes to buy, and an offer or ask is the price at which somebody wishes to sell. When the bid and ask coincide, a trade is made. The overall market is made up of millions of investors and traders , who may have differing ideas about the value of a specific stock and thus the price at which they are willing to buy or sell it.
A stock exchange provides a platform where such trading can be easily conducted by matching buyers and sellers of stocks. For the average person to get access to these exchanges, they would need a stockbroker. This stockbroker acts as the middleman between the buyer and the seller. Getting a stockbroker is most commonly accomplished by creating an account with a well-established retail broker. The stock market also offers a fascinating example of the laws of supply and demand at work in real-time.
For every stock transaction, there must be a buyer and a seller. Because of the immutable laws of supply and demand, if there are more buyers for a specific stock than there are sellers of it, the stock price will trend up. Conversely, if there are more sellers of the stock than buyers, the price will trend down. The bid-ask or bid-offer spread the difference between the bid price for a stock and its ask or offer price represents the difference between the highest price that a buyer is willing to pay or bid for a stock and the lowest price at which a seller is offering the stock.
A trade transaction occurs either when a buyer accepts the ask price or a seller takes the bid price. If buyers outnumber sellers, they may be willing to raise their bids in order to acquire the stock. Sellers will, therefore, ask higher prices for it, ratcheting the price up. If sellers outnumber buyers, they may be willing to accept lower offers for the stock, while buyers will also lower their bids, effectively forcing the price down.
Some stock markets rely on professional traders to maintain continuous bids and offers since a motivated buyer or seller may not find each other at any given moment. These are known as specialists or market makers. A two-sided market consists of the bid and the offer, and the spread is the difference in price between the bid and the offer. The more narrow the price spread and the larger size of the bids and offers the amount of shares on each side , the greater the liquidity of the stock.
Moreover, if there are many buyers and sellers at sequentially higher and lower prices, the market is said to have good depth. Matching buyers and sellers of stocks on an exchange was initially done manually, but it is now increasingly carried out through computerized trading systems.
The manual method of trading was based on a system known as the open outcry system, where traders used verbal and hand signal communications to buy and sell large blocks of stocks in the trading pit or the exchange floor.
However, the open outcry system has been superseded by electronic trading systems at most exchanges. These systems can match buyers and sellers far more efficiently and rapidly than humans can, resulting in significant benefits such as lower trading costs and faster trade execution.
High-quality stock markets tend to have small bid-ask spreads, high liquidity, and good depth, which means that individual stocks of high quality, large companies tend to have the same characteristics. Until recently, the ultimate goal for an entrepreneur was to get his or her company listed on a reputed stock exchange such as the NYSE or Nasdaq , because of the obvious benefits, which include:.
These benefits mean that most large companies are public rather than private. Very large private companies such as food and agriculture giant Cargill, industrial conglomerate Koch Industries, and DIY furniture retailer Ikea are among the world's most valuable private companies , and they are the exception rather than the norm. But there are some drawbacks to being listed on a stock exchange, such as:.
While this delayed listing may partly be attributable to the drawbacks listed above, the main reason could be that well-managed startups with a compelling business proposition have access to unprecedented amounts of capital from sovereign wealth funds , private equity, and venture capitalists.
Such access to seemingly unlimited amounts of capital would make an IPO and exchange listing much less of a pressing issue for a startup.
The number of publicly-traded companies in the U. Numerous studies have shown that, over long periods of time, stocks generate investment returns that are superior to those from every other asset class. Stock returns arise from capital gains and dividends. A capital gain occurs when you sell a stock at a higher price than the price at which you purchased it. A dividend is the share of profit that a company distributes to its shareholders. Dividends are an important component of stock returns.
They have contributed nearly one-third of total equity return since , while capital gains have contributed two-thirds. Investors who want to swing for the fences with the stocks in their portfolios should have a higher tolerance for risk. These investors will be keen to generate most of their returns from capital gains rather than dividends.
On the other hand, investors who are conservative and need the income from their portfolios may opt for stocks that have a long history of paying substantial dividends. While stocks can be classified in a number of ways, two of the most common are by market capitalization and by sector. Market cap refers to the total market value of a company's outstanding shares and is calculated by multiplying these shares by the current market price of one share. GICS is a four-tiered industry classification system that consists of 11 sectors and 24 industry groups.
The 11 sectors are:.
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