How the Stock Market Works
You may have an idea of what the concept of the stock market is, who are the key players, what are the ways to earn profit and what are the strategies used to earn those profit. You are now ready to learn how the stock market actually works. What I mean is, if you were to buy stocks, what would you actually have to do.
Market Makers
Like any market, one would expect that the buyer of stocks would buy from the seller of stocks, or at the very least the representatives of the buyer and seller would buy and sell the stocks. Considering that there are thousands of stocks sold and there are probably millions of both buyers and sellers of stock, it might be a little difficult to find the right stock to buy and the right seller to buy it from. That is why there are such people or entities (they may be computers) called market maker or specialist. These specialists are each assigned to a particular stock. They are the ultimate big brother for that stock. They are required by law to buy the stocks from those that are willing to sell them and sell the same stocks to those that want to buy them. So in the real world, if you ask your broker to buy a particular stock, say some shares of Microsoft, your broker goes to the market maker to buy those stocks for you. In the same manner, your broker will go to the same market maker to sell the stocks you want to sell.
You may now be wondering how the market maker makes his money. In the same way that brokers make money by getting commissions from you, specialists also get profits that are called spread. The spread is composed of the difference of the bid and ask prices of the stock. A bid is the price of the stock that the market maker is willing to buy and ask is the price of the stock that the market maker is willing to sell. Yup, you guessed it, market maker does not necessarily buy and sell the stocks at the same price. Don’t worry though; the spread is usually not more than $0.10.
The Bull and the Bear
The stock market has been often called to be a roller coaster ride, with its ups and downs. This ride has been documented to form a pattern, a cycle of the progress and recession of stocks. The start of the cycle is several years of the bull market or the period when the stocks are increasing in prices. This is followed by the bear market where the stock prices go down. Though the bull market period is longer than the bear market period, profits still abound regardless of dropping stock prices. This stock market strategy has been called going short. Going short means you sell stocks that are not your own, with the permission of the broker. Those that go short sell the stocks at the market price and they buy them back at a lower price. They can return the borrowed stocks and still earn from the buy and sell of the stocks.
There is much to learn about going short but at least now you know that though the stock prices aren’t always going up, profits can still abound.