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Stock exchanges therefore make trading easier, providing what's known as liquidity: a greater ability to buy or sell stock. Stock exchanges also help companies raise money so that they can grow their businesses. When a company first decides to list its shares on a stock exchange and sell stock to the public in an initial public offering , it typically uses the capital it receives from interested investors to expand its operations, do research and development, raise customer awareness through marketing, or pay for other things critical to long-term growth.
Investors can use stock exchanges to help distinguish healthy, reputable companies from more questionable ones. Stock exchanges have requirements for companies to meet in order to qualify to list their shares. The most prominent stock exchanges set strict listing requirements that are tough for most companies to hit, including minimum figures for outstanding shares, market capitalization, and company income.
Companies that list their stocks on stock exchanges also must give investors a lot of information about their businesses. The U. Securities and Exchange Commission requires listed companies to make these disclosures, including quarterly and annual financial reports.
These reports, along with other important news items disclosed as they occur, help investors know more about the companies in which they want to invest. There are two modes of operation that most stock exchanges generally use.
Some exchanges have traders physically located on an exchange floor, whose job it is to work directly with each other to buy and sell listed stocks. Historically, this was the primary way most exchanges worked. More recently, electronic trading has become the most common method for exchange operation.
Rather than physical trading floors with traders talking to each other directly, computerized platforms can connect buyers with sellers. Today, many exchanges that used to rely solely on a physical trading floor have incorporated electronic trading capabilities into their operations, using both methods together. Companies choose the stock exchange on which they'd like to list their shares based on several factors. Each exchange has its own listing requirements, so a company might qualify for one exchange but not another.
In addition, some exchanges have reputations for listing certain types of stocks. For instance, technology companies have historically preferred to list on the Nasdaq, because the Nasdaq was the first stock exchange to embrace advanced technology like electronic trading.
In addition to these two major markets, some smaller stock exchanges serve the U. Similarly, exchanges in Boston and Philadelphia that had a long history of operating independently are now controlled by Nasdaq. Companies often choose to list primarily in the country in which they're located, so international stock exchanges can give investors access to companies around the world.
View our list of the best-performing stocks this year. Investors who trade stocks do extensive research, often devoting hours a day to following the market. They rely on technical stock analysis , using tools to chart a stock's movements in an attempt to find trading opportunities and trends.
Many online brokers offer stock trading information, including analyst reports, stock research and charting tools. Learn the basics of how to read stock charts. Bull markets are followed by bear markets, and vice versa, with both often signaling the start of larger economic patterns. In other words, a bull market typically means investors are confident, which indicates economic growth.
A bear market shows investors are pulling back, indicating the economy may do so as well. The good news is that the average bull market far outlasts the average bear market, which is why over the long term you can grow your money by investing in stocks.
Explore this further with NerdWallet's investment calculator. While crashes can herald a bear market, remember what we mentioned above: Most bull markets last longer than bear markets — which means stock markets tend to rise in value over time. If you're worried about a crash, it helps to focus on the long term. Thirty-two percent of Americans who were invested in the stock market during at least one of the last five financial downturns pulled some or all of their money out of the market.
Even the Great Recession — a devastating downturn of historic proportions — posted a complete market recovery in just over five years. Use our calculator to find out. What you can avoid is the risk that comes from an undiversified portfolio. The stock market works through a network of exchanges — you may have heard of the New York Stock Exchange or the Nasdaq. Companies list shares of their stock on an exchange through a process called an initial public offering, or IPO. Investors purchase those shares, which allows the company to raise money to grow its business.
Investors can then buy and sell these stocks among themselves, and the exchange tracks the supply and demand of each listed stock. That supply and demand help determine the price for each security, or the levels at which stock market participants — investors and traders — are willing to buy or sell. This difference is called the bid-ask spread. For a trade to occur, a buyer needs to increase his price or a seller needs to decrease hers.
This all may sound complicated, but computer algorithms generally do most of price-setting calculations. Historically, stock trades likely took place in a physical marketplace. These days, the stock market works electronically, through the internet and online stockbrokers.
Each trade happens on a stock-by-stock basis, but overall stock prices often move in tandem because of news, political events, economic reports and other factors.
Stock market data may be delayed up to 20 minutes, and is intended solely for informational purposes, not for trading purposes. Investing in the stock market does come with risks, but with the right investment strategies, it can be done safely with minimal risk of long-term losses. Day trading, which requires rapidly buying and selling stocks based on price swings, is extremely risky.
Conversely, investing in the stock market for the long-term has proven to be an excellent way to build wealth over time.
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