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How & Why Stocks Are Traded

By: Anthony Green

It’s important to know the current trend of market activity from various terms used on Wall Street. A bear market is a market in which prices are on the turn down for a period of time. Generally speaking, when prices decline by 20 percent from their previous high, we are considered to be in the type of market where there are more sellers than buyers of stock.

The perception that we are in either a bull or a bear market is based on the decisions of each individual investor. Those who have cash and are willing to buy stocks feel confident about the future and are certain they can make more money by holding this type of security. Conversely, those who need to use cash for other purposes or feel pessimistic about the moneymaking capability of stocks will not want to hold a security that they feel will decline in value.

Depending on whether or not investors are in or out of the market at a particular point in time, they will either make or lose money, during a bullish or bear market environment.

Sometimes, as witnessed during the year 2000, the market has an indentiy crisis—it can’t decide whether to act like a bull or a bear but will move sideways instead. This can be very puzzling to investors, especially when inflation is under control and no recession is in sight. But the perception of slower economic growth, higher oil prices, and weak corporate earnings will lower investor confidence and give little prospect for a boost to stock prices.

Most importantly, potential investors want to know the company’s history of profitability and the outlook for future success of its products before purchasing any new stock. These and other factors help establish an offering price for the new shares. This price is determined in advance and is considered reasonable for attracting new buyers.

If conditions look favorable for the marketing of new stock, the investment banker will negotiate an agreement to underwrite the issue by buying all of the shares and then reselling them at a predetermined price. For larger issues of stock, inviting other dealers to join in the underwriting process spreads the risk. This concept is known as a syndicate group, where all firms together will contract to sell the new shares to investors at a set price.

Before a new issue of stock can be sold, however, each potential buyer must receive a prospectus. This legal document is required by the Securities and Exchange Commission (SEC) and contains essential facts regarding the financial condition and recent operations of the company. By reading the prospectus, a potential investor can make a more informed decision before committing any money to purchase the stock.

Article Source: http://www.articleresourceindex.com

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