Definition:
The Stock Market is the place of meeting sellers and buyers with quite a simple purpose – to trade company shares.
What is a Stock Market?
Stocks can be bought or sold on stock markets where sellers and buyers of public companies meet together. Stock markets work as well as auctions: potential buyers offer the highest price they are able to pay (“the bid”), and potential sellers offer the lowest price they are able to sell (“the ask”). The real price will be between the buyer’s offer and the seller’s offer.
Stockbrokers can provide trades and act in portfolio managers’ or individual investors’ (as you are) stead. In the USA the most famous between 13 stock exchanges are the New York Stock Exchange and Nasdaq.
Stock Markets are diverse, but combined with the same concept. The primary goal of every stock market is to connect sellers and buyers, who trade according to a concerted list of rules.
The main functions of the Stock Market
The Stock Market is a place where the public can get access to the shares of public companies. There is a similarity between the stock market and a farmer’s market: buyers and sellers in both types of market gather in one place to swap things.
However, the stock market has rapidly changing prices, so it can be considered as a more complex and orderly one.
There are three key activities that you can find in the stock market:
– Shares buying: Ordinary retail investors can buy shares of companies as well as experienced institutional ones.
– Stock Selling: Every stock trade needs to have a buyer and a seller.
– Share Issue: When a private company wants to get money, it can sell pieces of its property on the stock market. This is called Initial Public Offering (“IPO”). But in cases when a public company wants to get money, it can make it on the secondary public offering. After the shares are issued by both companies, the public can easily buy or sell them.
The stock market operates not only with shares. Exchange-traded funds (ETFs), REITs or other things called “securities” can also be traded on the stock market (although some details about the way they are valued or traded can differ).
Are there any risks for the stock market?
Definitely yes. It is very important to keep in mind that there are short-term and long-term risks. The stock prices can rise, but they can also plummet. The stock price can drop to $0 which means a complete loss of investment. That’s why investors should have a well-thought-out strategy which will help to manage their decisions.
What does the phrase “the market has rose” mean?
Thousands of companies trade their shares on stock markets. There are some stock market indices which are used to determine the stock price changes at any time.The best known index is the Dow Jones Industrial Index or the S&P 500 Index. The S&P 500 is an average of the 500 largest public companies listed in the United States by their market capitalization. Investors say that “the stock market rose” if the S&P 500 increased. But when the S&P 500 goes down, they say that “the stock market fell.”
Stock market operating principle
The stock market has the main purpose: to bring together buyers and sellers for negotiating stock trading. The stock market works like an auction to spot the prices.
1. Buyers are pressing for paying the lowest possible price. Stockbrokers offer the price they want to pay for the stock. The highest price becomes the “Best Bid”.
2. Sellers are pressing for selling at the highest possible price. The share owners or their stockbrokers propose the price they are ready to sell the shares. The lowest price becomes the “Best Asking Price”/Best Ask.
The “Spread” is the difference between the Best Bid and the Best Ask. Both parties put in their best to make a deal by the average price, and the intermediary, who carries out the deal, gets the difference as a reward.
The stock prices are moving. The stock price can often change because of the number of investors willing to buy or sell shares and the number of transactions that take place on the stock market.
Shares are usually traded through negotiations between the bid and ask prices. The prices may change with the shares of other companies when many factors (political or economical) affect the changes of markets.
Who uses the stock market?
Here you can find some of the key players of the stock market:
– Retail investors (like you) can buy or sell stocks through your brokerage count. When you make an order, it is sent to the market where transactions are made.
– Stockbrokers (aka registered representatives) – they have been trained and passed a special exam. They can buy and sell securities in investors stead. They work for brokers who can be principals or agents in transactions, earning money from margins (as principals) or commissions (as agents) on transactions.
– Portfolio managers – they are like school owners – they order a big amount of books because they teach a lot of people. They make big orders to buy and sell stocks because they manage big portfolios of stocks which belong to other investors.The portfolio manager in many cases handles a package of underlying securities in the fund’s portfolio if you own shares here.
– Investment bankers – they help to place stocks on stock exchanges.
Other participants in the stock market
Investors can be considered as the moving power because they’re the ones who want to buy or sell shares. However between buyers and sellers there are important agents who earn money by providing services to investors. Here is a list of key ones:
- Principals: This is a broker-dealer firm that has stocks they want to sell to investors. They also want to buy stocks from investors who are trying to sell them. Broker-dealers, who act as principals, earn money by adding a margin to the shares which were sold and the stocks which were bought by them.
- Agents: They are someones in the middle. They help to link the buying or sale request of one investor with the other side of the deal. They often charge a commission for their work.
- Stock Exchange: In the US the two most famous stock exchanges are the Nasdaq and the New York Stock Exchange, but the whole list consists of 13 exchanges. They charge a small commission for each deal that occurs there in exchange for their services. They also take a listing commission to companies that place their shares on the exchange.
- Custodians: They are the ones who hold your shares (mostly electronically, so you have a less risk of loss or theft). Brokerage houses usually pay them for this keeping service.
- Market-Makers: They are like your best friend who is ready for anything. These are firms that stand on the sidelines, ready to buy or sell shares at publicly quoted prices.
- Retail Investors: they are not professionals. They can buy or sell stocks by a personal brokerage account.
Who regulates the stock markets?
The Congress has granted the authority to regulate stock markets to the US Securities and Exchange Commission (US Security and Exchange Commission/SEC). Other countries have similar ways of regulation and agencies. These regulators have a broad mandate, and it is focused on customers. The main goals are investor protection, promoting justice and maintaining market efficiency.
Key rules of the stock market
The Securities and Exchange Commission sets principles and requirements for everybody who trades shares. Although these rules can be different in specifics for different stock markets in different countries, they are created to protect the investment with accuracy, transparency and consistency.
1. Price Transparency: Stock markets should guarantee that the best “bid” (the price the buyer is willing to pay) and the best “asking price” (the price the seller is willing to sell) are shown to participants to keep equity.
2. Confirmations: If you are a brokerage client trading stocks on the stock market, you have the rights to confirm the transaction with the main details of the transaction. These may be the time of the transaction, the real price you paid, and (if your broker charges a commission) the specific commission you charged.
3. Qualification Exams: Stock traders have to be licensed by FINRA. This is a self-regulatory organization which consists of exchanges and financial institutions. The process of licensing includes taking some exams that, among other things, cover the principle of market work.
4. Possibility of suspension:The exchange may be closed temporarily or for an entire day if trading in stocks or the whole market has certain price or volatility limits for a long time. This is a serious step (rarely used by exchanges) which helps to protect investors from trading in a panic and fix problems. The Securities and Exchange Commission or the exchange may also stop trading because of other important reasons.
Providing real-time price data is the main trait of modern stock markets. Investment moves must rely on the most actual information, stock exchanges focus on faster and more relevant price information.
Examples of the stock markets
In the US the two largest stock exchanges are the Nasdaq and the New York Stock Exchange. There are many other well-known stock exchanges around the world, including Euronext (with markets in Amsterdam, Brussels, Dublin, Lisbon and Paris), TMX Group in Toronto, and many others. These stock markets are exchanges where companies in a particular region typically place their shares. But the local markets may also be accessible to traders around the world, so stocks listed on one exchange may sometimes be traded on others.