How a Financial Market Works

In this article, the focus is on market economies-economic systems in which individuals own and operate businesses. All markets comprise two basic participants: the buyer and the seller. In a financial market, the buyer is the investor, The investor may be an individual, organization, or company. A buyer or investor may also be referred to as a consumer- one who buys or uses products or resources. The seller is the entity offering the product and may be an individual, company, government agency, or other organization.

Prices, for goods or services in any market depend largely on the supply and demand of the product or service. Demand is the quantity of goods that consumers purchase in a given time period. The law of demand suggests that the demand for a product and the cost of that product have an inverse relationship. Supply is the amount of products or services that a producer is able to make available to consumers at a given time. The law of supply suggests that as a product's cost increases, the demand , the quantity supplied to buyers also tends to rise. If the supply of a product is insufficient to meet the demand, consumers will pay more. On the other hand, if the supply outweighs the demand, the price will remain low. You can see the direct impact of the laws of supply and demand by going to an Internet auction site such as eBay.

http://www.ebay.com

The financial markets in the United States operate under the same basic economic rules as all other markets. Financial markets are made up of a number of different exchanges, which serve as central locations where buyers and sellers meet in person, by telephone, or by computer terminal to trade stocks, bonds, commodities, options, future contracts, and other securities. An exchange may be an actual building or a network of computers that serve as a central location where people buy and sell financial products.

Public corporations list their stocks and bonds on an exchange. These listings draw steady pool of interested buyers and sellers, or investors. Just as a newspaper doesn't own the goods or provide the services it advertises, a stock exchange doesn't own the stocks and bonds it lists.

Today, several exchanges make up what is known as the stock market(or the financial markets). However, most stocks in the United States are listed (traded) on these two exchanges: the New York Stock Exchange (NYSE) and the NASDAQ Stock Market. The NASDAQ is a computer-based trading system, while the NYSE is floor based. A traditional floor-based market operates in a specific building where the investor's agent must be present to trade stocks. To purchase company stock listed on the NYSE, the investor places an order through a stockbroker. The stockbroker relays the purchase to floor trader who is on the exchange floor. The floor trader then purchases the stock.

A computer-based market, such as the NASDAQ, enables investors to trade stocks through a telecommunications network; they access the market on desktop terminals anywhere they happen to be while a mainframe computer processes the trade.

The vast majority of businesses in this country are private. Private companies are owned solely by an individual, a family, or a small group of people, and do not have stocks that are traded on exchanges. Private companies are on every main street in every town and scattered throughout the cities of America. Barbershops, hair salons, bicycle stores, bowling alleys, video arcades, restaurants, candy stores, and other neighborhood shops are just some examples.

Conversely, publicly-traded companies are those that offer shares of stock, or partial ownership to those who wish to buy into that company.

The Internet and other new technologies are in many ways transforming how our markets operate. There are clear benefits to these changes, including lower costs and faster access to the markets for investors. The Internet is also used to educate many first-time investors about the basics of investing. It is essential for investors to understand that stock market investing always involves risk. Whether investing online or through more traditional means, consumers must know the following information:

The investments being purchased. The ground rules under which the stock or bond is being bought or sold. The level of risk involved with the investment products.

Online investors should remember that it is just as easy make or lose money.

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