Stock markets are an enticing and at the same time frightening place for many people. People know and have seen others make tons of money in these markets and at the same time many others who have lost money in the market too. What is important to understand in stock markets is how do these markets work? Once you understand this you can then look to enter the market and think about making good money.
The first thing about stock markets is that it is driven by the buyers and sellers and nothing else. It is the ideal case of market forces working to determine the cost of an item. In this case the cost is the share price. If the share is in hot demand many people are willing to put in more money to grab it and if it is not, then people are ready to sell it at a discount. This reflects in the stock price.
Share in general is a share in the ownership of a company. So for example a company is valued at $100,000 and they have 10,000 shares of the company. Then each share is $10 in value. If you have 100 shares you own 1% of the company. So in future if the company makes profit and decides to share it, you are entitled for 1% of the profits.
This is the primary basis of entering a stock market. You want to own companies that will make good profit going forward and you are investing in buying the ownership of the company. Now obviously, in the modern market that is not the sole criteria for people to purchase stocks. With so many novice investors in the market, the decisions are made more on the news rather than actual company potential. Such fluctuations give smart traders to make huge profits from the stocks.
If you look at the typical cycle of a stock in the market you will see ups and downs. Regardless of how good a company is, its stock prices are bound to fall and pick up later. A smart investor is one who can enter the stock at its lows and exist it at the highs. Of course, you can never predict the highs and lows so you are always taking a risk. As long as this risk is based on some data to back your decision, chances of going wrong are minimised.
This is how a stock market functions in what is called a secondary market. Many companies come out with an Initial Public Offering or IPO and people bid for the shares of this company. This is called primary market. Here the stock price is fixed within a band so people cannot bid over the band, they can only bid for more or less shares. The mechanism of the primary market, hence is slightly different from secondary market.
These are two common ways for people to enter the stock market. As long as you understand how the stock price can fluctuate you can make sound decisions. Enter in at the right time and exit at the right time, you will make profits almost always.