By definition a stock market is a gathering of individuals who buy and sell stock amongst each other. A stock market can have a physical location such as the New York Stock Exchange where trading occurs at 11 Wall Street New York City. At that location traders interact with each other in person and trading takes place “on the floor”. An exchange can also operate strictly in the virtual world (i.e only online) and the largest such exchange is the NASDAQ.
Companies elect to have their shares trade on the stock market to raise funds to either continue running their business or in order to further expand. Keep in mind shares or stock of a company represents part ownership which is available to investors to buy. Publically traded companies are selling part ownership to the public in exchange for cash which can be used to build new facilities or expand to new international markets.
Suppose Rebecca buys 100 shares of Apple. She is essentially exchanging or “investing” money for part ownership in Apple. Rebecca now owns a very small percentage of Apple. The value of this ownership fluctuates daily and the price of the stock can rise or fall on any given day. If the company does well and earns large profits then this will be reflected in the price of the stock. In Rebecca’s case if she had purchased shares of Apple 10 years ago she would have earned substantial returns as the company is profiting tremendously from all products within the “iFamily”. The stock has appreciated tremendously since the company is more valuable today than it was 10 years ago. On the other hand if the company performs poorly and loses money then the price of the stock will drop to reflect the fact that each share is less valuable than it was before.
Today the majority of activity conducted on the stock exchange is done by “day traders”. Day traders buy and sell stock throughout the day with the sole purpose of gaining profit from short term trades which can range in time from seconds to hours. This is the opposite of long term investors such as Rebecca that buys 100 shares of Apple for the long run. Day traders have access to trading platforms that can execute trades at incredibly fast speed and at a much lower cost compared to retail brokers such as E*trade or Interactive Brokers. One such firm that offers access to trade is PromptTrader which can offer clients a Direct Market Access (DMA) platform that is plugged in directly to all the major exchanges. While exact numbers are impossible to calculate it’s believed that 50-80% of all activity on the stock market is performed by day traders.
About the author: Jayson Derrick is the director of trading at PromptTrader, an international proprietary trading firm that deals in US equities and options.
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