Stock Market Basics —
A Primer On How The Stock Market Works

Before we look into investment strategies, let's first study some Stock Market basics. The main components of the Stock Market are:

• The types of instruments traded in this market

  • Stocks- also called equities, these are the most popular.

  • Bonds - also called debt instruments

  • Options - also called derivatives




• The Key Players
All transactions are carried out by stock brokers -- either "real" people or sophisticated computer networks.




• The Organizations involved
All the action takes place in what's called Stock Exchanges. In the United States there are three main stock exchanges -- NYSE, AMEX, and Nasdaq.

Tying it all together....

Let's try and view these components through a simple analogy. Think of the Stock Market as a big Farmer's Market. Let's divide this huge Farmer's Market into three zones (three major U.S. Stock Exchanges). Now each zone has its own set of unique products (think publicly traded companies). That means, if it's watermelons (Google) we're looking for, we can find them in only one of the three zones (Nasdaq, in the case of Google).

One key difference here is that we can only buy and trade produce (stocks) through a broker and not directly. And, the trading is more like an auction ..... if we're interested in buying watermelons, we're bidding against other like-minded folks who also have a hankering for watermelons.

There are also multiple sellers of watermelons. The brokers for both the buyers and sellers are now working at a feverish pace matching the sellers and buyers bids. Each time they find a match ... we have a trade!

As you can see, price of produce (or stocks) is determined by the market -- the buying and selling dynamics.

That, in a nutshell, covers all the Stock Market basics you need to know. We told you we'd keep it simple!

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