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How Does the Stock Market Work?

how-does-the-stock-market-work

More than 90 million Americans presently own individual shares of company stock, either through direct investment or via a mutual fund. Each day, the New York Stock Exchange (NYSE) is the central market of barter for these tiny pieces of corporate America, changing hands to the tune of tens of billions of dollars in transactions each year.

History of the New York Stock Exchange

The NYSE was launched in 1792, when two dozen brokers and merchants signed the historic “Buttonwood Agreement”. Today, there are two basic components of the NYSE: the New York Stock Exchange proper, where investors buy and sell listed companies’ stocks and other securities; and the NYSE Arca, an all-electronic version of the physical marketplace that can be accessed by investors across the U.S. as well as internationally. Typically, the volume of shares traded on the Arca is about a third of that traded on the floor of the NYSE. The criteria for a company listing on Arca is also less stringent than it is for the NYSE, allowing companies to begin there first before graduating, where applicable, to full NYSE company listing.

Securities and Exchange Commission

Companies listed on the NYSE pay both an initial fee and annual membership fees. All activity is governed and overseen by federal agency the Securities and Exchange Commission (SEC). In many ways, the NYSE and other stock exchanges around the world are nothing more than a new, sophisticated version of the old town square marketplace, with the price of a stock item determined by the age-old flow of supply and demand.

Factors Influencing Stock Price Fluctuation

Some of the factors that influence the fluctuation of a stock’s price include world events, research findings and, most importantly, a company’s quarterly earnings. If the earnings are below expectations, the results can be disastrous. For example, in the fall of 2010, Cisco experienced its biggest one-day stock price drop in nearly 20 years (16%) when its earnings announcements for the third quarter of 2010 were much lower than anticipated.

 

Resources

New York Stock Exchange – Chapter 1: At the Heart of Global Financial Markets, Retrieved November 14, 2010 from http://www.nyse.com/pdfs/nyse_chap_01.pdf

New York Stock Exchange – Chapter 4: What Drives Stock Prices, Retrieved November 14, 2010 from http://www.nyse.com/pdfs/nyse_chap_04.pdf

Motley Fool – “Why Did My Stock Just Die?”, November 12, 2010, Retrieved November 14, 2010 from http://www.fool.com/investing/general/2010/11/12/why-did-my-stock-just-die.aspx

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