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Home How does the stock market work?
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Thursday, 26 March 2009 02:53

How does the stock market work?

So how does the stock market work? The "stock market", while a market itself, is also sometimes used in a generic sense to refer to just about any financial instrument or security that is traded, including bonds, options and futures.

In the United States there are 3 main exchanges on which stocks are traded: The NYSE (New York Stock Exchange), the NASDAQ (National Association of Securities Dealers Automated Quotations), and the AMEX (American Exchange). Most other countries also have their own exchanges, for example in Japan it's the TSE (Tokyo Stock Exchange), in Germany it's the DAX and in India it's the SENSEX. And these are just the markets that trade stocks.

There are other markets such as the commodities market where things like oil and wheat are traded, and there's also markets for bonds and currencies. And there are sub markets within all these markets. The sum of all these markets is sometimes called the "financial markets", the "capital markets" or just the plain old "market" :-).

Each and every business day, billions of dollars in stock are traded among all these exchanges. When you as an individual place an order to buy or sell stock in a company, that order is routed through your broker to a "market maker". A market maker actually makes a market in a stock: if you want to buy a stock and there are no sellers, the market maker sells you his shares. If you want to sell a stock and there are no buyers, the market maker will buy your shares. Market makers are important because they keep liquidity in the system and ensure you can buy and sell stock at any time when the market is open.

Stock market hours of operation

The three main exchanges in the USA (NYSE, NASDAQ and AMEX), are open Monday through Friday, from 9:30 AM to 4:00 PM, eastern time. It is also possible to trade before the market opens (pre-market trading), and after the market closes (after-hours trading). However, trading in these extended periods is usually not very liquid and is subject to high volatility - which makes them very risky to trade in. As far as I know most brokers offer individual investors the opportunity to trade in extended hours trading as well as the normal trading session, but you shoud check with your broker to make sure.

All in all, the stock market is huge - it's really almost mind boggling when you think about it, so much money exchanges hands every day, yet all that money still somehow manages to get accounted for!

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Last Updated on Sunday, 29 March 2009 14:32