What is the stock market and what does it do ? Explained by Digimagg
The stock market is a platform where investors buy and sell shares of publicly traded companies, influencing prices based on supply and demand.
Understanding the stock market: An overview
The phrase "stock market" encompasses various trading platforms where shares of publicly traded companies change hands. These transactions occur through formal exchanges or over-the-counter (OTC) markets, regulated by specific guidelines. "Stock market" and "stock exchange" are commonly used interchangeably. Traders engage in buying or selling shares on these exchanges. Prominent U.S. stock exchanges include the New York Stock Exchange (NYSE) and Nasdaq.
The stock market facilitates interactions between buyers and sellers of securities, enabling transactions and price discovery for corporate shares, reflecting the overall economic conditions. It ensures fair pricing, liquidity, and transparency as participants compete openly. Originating in a London coffeehouse in 1773, the first stock market emerged, followed by the inaugural U.S. exchange in Philadelphia in 1790. The Buttonwood Agreement, signed under a tree in 1792, heralded New York's Wall Street, later renamed the New York Stock and Exchange Board in 1817. Regulated by bodies like the SEC and FINRA, today's stock markets operate electronically, contrasting with their paper-based origins.
Functions of the stock market
The stock market ensures transparency, liquidity, price discovery, and equitable trading practices.
It guarantees that all participants have access to information on buy and sell orders, ensuring fair and transparent pricing of securities. The market efficiently matches suitable buy and sell orders.
Price discovery, where a stock's price is collectively determined by buyers and sellers, is a crucial function. Access to placing orders should be instantaneous, with execution occurring at a fair price.
Market participants include investors, traders, speculators, and hedgers. Investors typically hold stocks long-term, while traders may enter and exit positions rapidly. Market makers provide liquidity, and hedgers engage in derivatives trading.
Regulation of stock markets
Stock markets worldwide are subject to oversight by local financial regulatory bodies or monetary authorities. In the United States, the Securities and Exchange Commission (SEC) is responsible for regulating the stock market.
Operating independently from the government and free from political influence, the SEC's mandate is to "protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation."
Listed companies on stock exchanges are subject to regulation and oversight by the SEC. Additionally, exchanges establish requirements such as timely submission of quarterly financial reports and immediate disclosure of pertinent corporate developments to ensure equal access to information for all market participants.
Non-compliance with regulations can result in trading suspension and other disciplinary actions.
How does the stock market operate?
Operating within regulatory frameworks, stock markets serve as platforms for primary and secondary market activities. In the primary market, companies issue shares through IPOs, raising capital from investors. Shares are priced and sold to the public, with the stock market providing the necessary marketplace for trading. Additional offerings, such as rights issues or follow-on offerings, may occur later. Investors buy shares with expectations of capital appreciation or dividends. Stock exchanges facilitate these transactions, earning fees for their services. In the secondary market, investors trade existing securities. Stock exchanges also track market performance through indices like the S&P 500 and Nasdaq 100.
After an IPO, the stock market operates as a platform for trading existing shares, known as the secondary market. The exchange charges fees for each trade executed on its platform during secondary market transactions.
What does the term "Alternate Trading System" refer to?
Alternative trading systems serve as platforms for matching significant buy and sell orders, operating outside the regulatory oversight of traditional exchanges. Dark pools and numerous cryptocurrency exchanges function as private forums for trading securities and currencies, often within restricted user groups.
Why is the stock market significant?
The stock market plays a vital role in a free-market economy. It enables companies to raise capital by issuing shares and bonds, while providing investors with opportunities to benefit from company successes through capital gains and dividends. Additionally, it efficiently channels individual savings and investments into productive ventures, contributing to capital formation and fostering economic growth within the country.
Who assists investors in stock market trading?
Stockbrokers serve as intermediaries between investors and stock exchanges, executing buy and sell orders. Portfolio managers are professionals responsible for managing portfolios of securities on behalf of clients. Investment bankers represent companies in different scenarios, including facilitating IPOs for private companies or managing mergers and acquisitions.
