THE floor of a traditional stock exchange seems to be a chaotic marketplace. Mysterious (to an outsider) hand signals are employed, coded messages on electronic tickers appear and change at a frantic pace, and floor brokers compete to be heard above the flurry of activity.
Today, however, many people once bewildered by the stock market are investing in stocks. Why? For one thing, the Internet has enabled investors to access in moments financial news, investment advice, and stockbrokers. Paul Farrell, a journalist conversant with the Wall Street, writes: “For [individual investors], cyberspace investing is the new frontier, the new gold rush, the freedom to be yourself, with the opportunity to become financially independent while working at home.”
On the other hand, some financial advisers are alarmed by the eagerness of many to invest in a market that they may know very little about. One investment dealer with more than three decades of experience in the securities industry was quoted as saying: “More people are buying into the stock market as speculators, not investors. Some may call it investing, but they don’t know anything about the company [whose stock] they are buying and selling.”
What factors should you weigh before investing your money? Since a measure of risk is involved with the trading of stocks, is it gambling? First, let us consider how the stock market operates.

What Piece Of The Pie Are You Buying?

Companies need capital, or invested money, to operate successfully. When a company prospers and requires a large amount of capital, its management may choose to offer shares of its stock to the public. One guide to the stock market illustrates it this way: “Stocks are pieces of the corporate pie. When you buy stocks, or shares, you own a slice of the company.”
At a street market, buyers and sellers meet and conduct business. Similarly, the stock exchange is a marketplace for those who buy and sell stocks. Before the development of the exchange, stocks were traded through brokers at coffeehouses and on the roadside. Trading under a buttonwood tree at 68 Wall Street led to the formation of the New York Stock Exchange. Now there are stock exchanges in many countries. On any given business day, at any hour, there is a stock market open somewhere in the world.
To trade stocks, an investor usually opens an account with a broker and places an order. Today orders to buy or sell stock can be placed over the telephone, through the Internet, or in person. The broker then needs to execute the order on behalf of the investor. If the stock is traded on a traditional trading floor, the brokerage office directs one of its floor brokers to buy or sell stock for the investor. In recent years some exchanges have adopted a completely electronic trading system, where trades can be made seconds after the order is placed with a broker. Trades are then recorded on stock quotations—current prices and trading details displayed on an electronic ticker.
The price at which stocks are bought or sold is usually determined by competitive bidding, as at an auction. Business news, company earnings, and the future prospects of an enterprise can all influence the price of a stock. Investors hope to buy their stock at a low price and sell their shares for a profit after they increase in value. A portion of the company’s profits may also be divided among the shareholders as dividends. Some people buy stocks as a long-term investment; others trade stocks regularly, hoping to profit from stock prices that rise dramatically in a short time.
While the trading of stocks has traditionally been done over the telephone, on-line trading (buying and selling stocks over the Internet) has become increasingly popular. The Financial Post reports that the number of on-line trades in the United States “increased from about 100,000 per day in 1996 to nearly 500,000 by the end of June [1999] with nearly 16% of all trades in the United States done electronically.” In Sweden some 20 percent of all stock trading in 1999 was done over the Internet.