Trading 101: How Does the Stock Market Work?

– I’ve done a video about
what the stock market is, but now I want to talk about how the stock market actually works. Now I’m pretty excited about this video jut because it was totally not my idea. It was inspired by a comment that I got on the previous video that
I’ve already referenced, What is the Stock Market, and I’ll fully admit I
assumed, sorry about that. I just figured everybody would understand what this person is asking. But now if I, you know, pull myself out of my shoes and put myself in a, you know, brand new trader’s shoes. Then, oh yeah, that makes perfect sense. So, like I said, sorry for the assuming, but now we’re going to
go through this comment bit by bit and that’s going to, you know, prompt pretty much all the talking points in this video. I should note, if you did not watch What is the Stock Market video, and you have no idea what
the stock market even is go back and watch that video first, because we’re going to kind
of piggy back off of that. For those of you that
have watched that video, you know, we’re going to be talking more about pizza, so that should
still make sense to you. So lets get to this comment and then we’ll jump right into the different
questions and topics. So this person says, “Who are you trading your stocks with “and why are you trading them. “What’s the purpose? “Are you trading with
other shareholders and why? “Like why would you sell your stock and “if you sell, what do you get in return? “Another stock? I wish one
video would explain this. “I am super, I am a super beginner “and everyone skips this part. “Anyone mind explaining this please? “I would really appreciate it.” So lets go back to this first part. And that’ll provide us with
our initial talking point. Who are you trading your stocks with and why are you trading them? What’s the purpose? So who are you trading stocks with? Well the stock market. A market is just made
up of a bunch of people. So that’s who you’re trading stocks with. Now sure you can have different entities, you know hedge funds,
you know, algorithms. All sorts of different stuff like that. But don’t confuse yourself with that. Just understand you’re trading with, at the end of the day, other people that make up the market. So in this example, lets just say we have Billy Bob right here. So
we’ll just call him BB. Billy Bob, and he owns a stock. He owns a share of something. In our case, going back to the previous video; almost
said the piece of pizza. He own some pepperoni
pizza, or a slice of it. So that’s just what a share is. He owns a slice of pepperoni pizza and he bought that for five dollars. So Billy Bob is a
participant in the market. He is somebody that is
making up the market itself. So what is the purpose of all this? At the end of the day, the purpose is Billy Bob wants to make money. Whether it’s money in the very short term, like a trader would want to do. Whether it’s money later
on in life, for retirement. The whole point is you want
to grow money in the market. So at its core, make money. That’s the whole purpose of trading. That’s the whole purpose
of the stock market any way you slice it, pun intended. So. But Billy’s just one person, right? What then goes on is
if Billy wants to sell. So this is kind of like a
little buffer zone here, that is within the market and this is what we would call a broker. And in this day and age,
you know, you can still get the phone and talk to your broker but online is where the vast majority of this broker stuff is happening. So the broker is what’s
connecting Billy Bob to other people in the market. So this next part, “Are you trading with “other shareholders and why? “Like why would you sell your stock and “if you sell it what do you get in return? “Another stock?” So are you trading with
other shareholders? Maybe. Maybe not. Some people could also
already own pepperoni pizza. Maybe they want some more slices of it, some more shares of it. Maybe somebody does not own
any pepperoni pizza at all. So in that case, they’re not a shareholder but they want to become a shareholder. So are you only trading
with other shareholders? Absolutely not. Take you for example. Maybe you’ve never traded a stock ever but you could enter into the market and you would then be able
to buy and participate. So no, you’re not always
trading with other shareholders, sometimes it might just
be somebody brand new. But again, why would you want to do, why would you want to do all this? To make money. That’s what the end, that’s it. To make make money, that’s the
whole purpose of all of this. Now what do you get in return? Let’s go through that. So, this is really going to summarize what’s going on within the market. Billy Bob, he bought that piece of pizza, pepperoni for five dollars. Some good things go on, you know pepperoni is
super good for your health. New, you know, research comes out. So that all the sudden causes his five dollar piece of pepperoni pizza to now be worth $8.50. So that’s good, because
he bought it for five, now all the sudden it’s worth $8.50. And why would he sell? So, I don’t know. There’s so many reason. Maybe he’s got a bill
that he needs to pay. Maybe he just thinks that
8.50 is kind of over valued. That’s crazy, I can’t believe that somebody’s willing to pay that much. I don’t think it’s going
to go up any higher price. So he just wants to get out. Maybe, like I said, he’s in retirement and he needs that money to, I. There’s just so many reasons. Why do people sell? Again, at the end of the day, people sell because they want to put the money in their pocket. As long as he owns pepperoni pizza, a share of it, it’s just a
piece of pepperoni pizza. It doesn’t have any value until you sell. So in order to, what’s
call “realize” the gain, you need to actually sell. So that is why, at its core,
because he wants money. He wants to put money in his pocket because before you sell, yes something might be “worth” 8.50, but it’s only “worth.” You lock in the worth when you sell. So how is he going to do this? Does he go to his neighbor,
knock on the door and say, “Hey I’ve got a share of pepperoni pizza. “Do you want to buy
this from me for $8.50?” Good news is no, that’s not
how the market works at all. The way everything does work though is we have other people in the market. So over here, give her some hair, we have Sally Sue. And Sally Sue is just brand new. She’s “Hey I’m getting into the market “and I read all these
studies on pepperoni pizza. “It’s supposed to be really good. “I think pepperoni pizza’s only going “to get more valuable. “So I would like to buy
some pepperoni pizza.” Well what does she need
to do in order to buy? Well she needs to find,
she needs to find a seller. So what she’s going to do is, she’s going to go to her broker. What Billy Bob’s doing, because remember he wants to sell. So what does he need
to do in order to sell? Well, he needs a buyer right? If you try to sell your car yeah you can sell it, but until a buyer comes along, it’s just going to be sitting out in your front yard. So he is also going to go to his buyer, or, excuse me, go to his
broker looking for a buyer. So he is looking for a buyer. She is looking for a seller. And the broker right here, online, is where it’s all taking place. And this is all taking place
in fractions of a second. If you go to your online
broker and you’re clicking Buy, Sell, all that sort of stuff. I mean this stuff is happening like this. This is a very just simplistic way, but that’s how it’s operating and your broker is, is computer programs. And it’s matching up
people that want to buy with people that want to sell. It’s helping Billy Bob find a buyer. It’s helping Sally Sue find a seller. It’s bringing them together and then it’s going to allow
the exchange to happen. So Sally Sue, thanks to their broker, all this stuff was happening online. She gets he shares and she pays $8.50. So we’ll go through some
quick math real quick. He bought, Billy Bob, for five dollars and he sold for $8.50. So what is the difference
between these numbers. Some quick math; the difference is $3.50. So to answer the final question, “What does Billy Bob get for selling? Does he get more shares?” No, he is getting cash. He is getting money into his account, which equates to $3.50 on the gain. Because he originally
had to spend five dollars all the sudden he now
has $8.50 in his account. So then you do the math. Well he’s got $3.50 more
than where he started therefore this is his actual gain. But to answer the heart of the question, when you sell your broker is
putting money into the pocket. So Sally Sue does not have to you know, jump over all this and walk
over to Billy Bob’s house and, you know, grab her
purse and hand him $8.50. The seller is giving
the money to the broker and then the broker is giving
the money to Billy Bob. And this again is all happening in, you know, seconds. It’s very quick and it
happens just like that. So by no means is this some You know, if you’re
trying to sell a house, obviously that’s a big long process. You have to put in an offer
and go through paperwork and then wait for things. And then transaction, you know, just all. If you’ve ever bought a
house you know exactly what I’m talking about. Not so here. This is. (snaps) Everything happens due to the broker and, you know, the way
everything is set up. So, you know, to kind of
answer those final questions, why are people selling? Why do people trade? To make money. Why would they? Because they need money. They want to convert
their shares into money. That’s how you convert a share of stock, a piece of pizza, into actual cash. And then what are you getting in return? Are you getting more shares? Are you getting, what are you getting? You’re just getting cash. It’s like your checking account. All the sudden money shows
up in your checking account and the ideal, idea is you want more money than what you started with. Now if something bad happened and Billy Bob could only sell to Sally Sue for three dollars, well he spent five dollars
but now his broker’s only putting three dollars
back into his account, which means he lost two dollars. So it’s not, you’re not
always going to make money. But that’s the goal. You want your broker to
be putting more money into your account than
what you started with. But this is how the stock market works. Your broker is matching
up buyers and sellers. Some people want to sell,
some people want to buy. Why? What are their motivations? It truly is endless on why
somebody would want to sell or why somebody would want to buy. Obviously these people are buying because they think the value
is going to go higher. People are selling because, A, they need some cash
right then and there or B, they think, “Eh,
I don’t think the value “is going to go any higher. “I want to get out right now.” But, you know, all the
little details of that, I mean that is truly a case by case basis. So hopefully this helps you out. Fantastic questions. And, you know, if you or anybody have any questions, please leave those in the comments below. Like I said, I would never have planned on doing a video like this because in my mind this
is just common sense. Well yeah that’s how the market works, but I’m not brand new anymore so maybe there are some
other things I’m overlooking. So I do appreciate suggestions and comments in the comment section below. If you’ve enjoyed the video,
or if you found it helpful, click that like button. Check out other videos on the channel. I offer a lot more than just, you know, kind of these basic introductory topics. So definitely search around and hopefully you decide to subscribe. But thank you as always for watching. And I’ll see you back for the next video.

100 thoughts on “Trading 101: How Does the Stock Market Work?”

  1. Hi Clay. I am an absolute dummy in this thing. Do you necessarily need to have multiple monitors and what are some important software or tools needed to be used?

  2. Does the buyer pay the Broker or does the seller pay the Broker? How much? Can you just go to a company website and purchase how do you purchase?

  3. Is this how Robinhood trading app works? Like if I'm selling at the 850, there's immediately someone buying it at 850?

  4. Hey clay. So this broker is basically an online mediator of sorts. What does the broker gain in this process?

  5. I know this video is old, but my question is, how does the company make money from billy bob and sally making money? Commission from the broker?

  6. Thank you so much. This and the previous video is very informative. I just want to ask, can you gain money without selling your share? And how do you know if the value of a share gets higher? Thank you very much

  7. So my question is, aside the profits gained from selling shares at a more higher value than you bought it, do you also get any dividends from the company for just buying the shares?

  8. Will the broker deduct any of my returns as brokerage fee? If so, what amount or portion of returns is too much to deduct from my returns? Is the any legislation regulating the fees that brokers can charge investors when making a transaction?

  9. Hi, I am from Kenya. I have binge watched some of your videos and I am wondering if I can invest in stocks in another country and how?

  10. So say I buy 5 shares of Apple (ea. share @ $190.08) – total spent would be $950.04 (overall this is what my share/s as a whole is worth?). Let's say Apple somehow get some positive traction on CNBC this morning and suddenly apple shares went up +20.6%. now making each share worth $229.23. If I am to sell all my (5)shares, now worth +$1146.15 – I would have lost or gained $196.11? That's where I'm really curious and just wanting someone to clarify just to make sure I'm not confusing myself.

  11. So were gonna still talk about pizza & that should make sense to you.

    Yes why yes it does make sense.

  12. When you watch a 12 minute video and learn more useful information than you learn in 12 years of school

  13. Great Video! Learnt a lot from this. Also I had some basic queries as a beginner.
    So the broker is the mediator helping people trade shares, so do brokers first buy shares from the company or is it that the company sells its shares to these brokers directly? And in that case since there are many brokers, are the prices of shares of one company the same everywhere with all the brokers?

    Also what are these companies like NASDAQ? Are they brokers?

    Sorry for asking a lot of questions, any reply would be appreciated.

    Thank you!

  14. Thanks for sharing this.
    What is d best stock market to invest? Im from d Philippines can i invest in international stock market?

  15. here is very simple answer.. let's say bb have a company, he want to grow his empire but he need a lot of money. so he listed his company to stock market so he can sell shares.. he sell share to get money so he can grow his company.. after got listed, people read about his company and believe it have huge potential, therefore many people buy the shares.. since many people buying the share, the share prices increase and become expansive.. so now.. people who have the cheap share now can sell it as it become expansive.. so they get profit… that's it. sound easy but buying shares and selling is very complex.

  16. Is there any reason to buy a stock even if you don’t intend to sell it later at a higher price??? In other words, does the company give you some percentage of their earnings since you own a portion of their company? Thanks so much in advance!

  17. So, I am going to be a senior this year and am already taking college class and I was wondering if there was an actual minor that I can go for and to take classes that allow me learn more about stock and trading

  18. Enjoyed the videos this really helps alot..I'm starting off on robinhood app and I'm hungry to keep learning n investing thank u!!

  19. finances are scary for most poeple who dont usually invest…your videos take all the "big words" out of simple questions. You are saving people a lot of time, worry and grief…..thank you VERY much for making these videos

  20. i know its been years but i still dont understand, do you get something directly from the company you bought the stocks from?

  21. What happens if there is no buyer? Are all shares (or slices) of one company (pizza) identical? Is there a limit to the amount of shares a company can be divided into? Danke im voraus.

  22. Is there like a maximum amount of stocks a plc will sell until you just have to buy between traders and sellers? Also, let's say everyone went to sell their stocks, so there were no buyers: would you just have to keep the stock, or is there any way to get rid of it without selling?

  23. Thank you so much, your videos are really helpful, I was wondering if there is a way to make money via being the broker, like similar to bitcoin ? Or does that not work with the stock market?

  24. Hi Clay, i dunno if you're still active in answering question BUT then again, I'm new to stock trading. I already have a cash account but I dont have my "own" online trader. Is that a person I pay commision to …to trade for me? Can i not trade by my self? or are they the "behind the scene guys" that facilitate all this tradings? Am i making any sense?

  25. I'm thinking of buying a share but I've never invested in the stock market but I have 1 question. Where does your money go when you sell the share? Is it linked to some sort of banking account?

  26. I love how I'm only 11and I already know how the stock market works because my dad taught me how it works when I was 8.

  27. I know I’m 3 years late and I hope you see this. Please help explain more I know about the trading aspect the while buying and selling and the broker. It I always thought that we get like a monthly or annual payment from the company we buy the stocks from. If not why then do we buy

  28. Does BB get the $8.50 in his account meaning he gets his main investment back plus his profit? or does he get just the profit of $3.50 in his account? And If he just gets the profit, where does his $5.00 (main investment ) stays?

    And when it comes to loosing money. How do you loose money? Lets say you bought the stock $5.00 but its value went down to $2.00. Do you loose without selling it? Or do you have to sell it in order to be confirmed as a lost? Or can you just leave it there and see if it goes back up? Or because of a decrease in value now you owe something to lets say the broker? I mean how do you loose without selling?
    What is the risk of trading that everyone talks about? My opinion is you haven’t lost anything unless you sell after the value has decreased. If you don’t sell you haven’t lost anything? You don’t want to loose, then don’t sell it. The only risk is that it would never ever come back up. And what happens when the market crashes? Does everything just disappears? Or the money ends up in someones hands?

  29. what if you decide to keep your stock will you be still getting money? and what if you want money for retirement and make money in the very short term like you mentioned? i’m a teenager trying to learn your videos helped a lot thanks

  30. Sir.. can you just answer how in all this game the company is making money? u just talked about the shareholders what about the company?

  31. Great information, but I’m curious, is there ever a scenario where it’s extremely hard to sell because no trader is interested in buying?

  32. I have one question for you. So if you were to buy a stock, and then you wanted to trade that stock later, would you get the money back for the previous stock that you bought and transfer it into your new one?

  33. Sooo… it’s kinda of the same concept of buying an item and flipping it to change the value. Then, selling it and harvesting the change in value minus what you invested initially…. except there’s no work to flip it.

  34. Do u have to gain more money than your original price like if u buy a share by 10 dollars do u have to sell it if it becomes 21 dollars then u benefit 1$

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