What is the Stock Market?
The stock market is a loose network of economic transactions of stocks or shares of businesses which includes publicly held companies, bonds, and any other security classes. The stock market trade can take place via Over The Counter (OTC) marketplaces or through formal exchanges.
Stock Market Broken Down
There are two main sections in the stock market. These are known as the primary market and secondary market.
- The primary market – is the ones that are usually bought from investment banks and are offered first through initial public offering or IPO. The IPO opening price is determined by the worth and number of shares that the private company turning public is.
- The secondary market – On the other hand, refers to the subsequent trading by both individual and institutional traders or investors. The money raised is used to grow the IPO, but the company does not receive any amount from the profit as soon as the stock trading starts.
For large companies specifically, those that are located in major cities such as Tokyo and London, their stocks are commonly traded through exchanges. With these exchanges, buyers and sellers are all brought together and organized in as much as stocks are listed and traded.
In today’s modern world, both stocks and exchanges trading is done electronically. Gone are the days where stocks and exchanges trading make use of physical certificates.
In the United States, the most famous stocks exchanges are the Nasdaq and New York Stock Exchange or NYSE.
The New York Stock Exchange was founded in 1792 in Wall Street and is considered as the largest, and definitely the most powerful of all stock exchanges in the world. Nasdaq was established in 1971 and originally offered over the counter securities. Generally speaking, firms are under Nasdaq which means that Nasdaq has more listed companies.
The U.S. Stock Market is regulated by the Securities and Exchange Commission which is a federal agency which greatly depends on the reigning political party. It aims to protect investors, maintain fair, orderly, and efficient markets in as much as to facilitate capital formation.
There are two primary types of securities transacted in the stock markets. The first one is the Over The Counter securities (OTC) which are directly exchanged between parties involved and reflects on the pink sheet, not on the stock market exchange. This is because pick sheets do not often meet the requirements to make it on the list and have a low float. Low float refers to thinly traded stocks, penny stocks, companies in bankruptcy, and closely held companies. Over The Counter (OTC) securities does not need to comply with the requirements set by the Securities and Exchange Commission, thus investing in them is like investing in a private company.
Who are the People Involved in Stock Market?
There are a lot of people involved in the stock market. Each of them has individual roles, but their roles are interconnected.
- Stock Brokers – In the U.S., stock brokers are known as the registered representatives since they buy and sell stocks on behalf of the investors in as much as they act as the intermediaries.
- Stock Analysts – Their main task is to do research which is disseminated to the clients and parties who wishes to buy or sell stocks. They are also tasked to rate the security whether it is the best time to buy, sell or hold a stock.
- Portfolio Managers – They are professionals who collect securities or portfolios and invest it for their clients. They are recommended by analysts and decide either to buy or sell. Portfolio Managers are usually maximized by hedge funds, pension plans and mutual fund companies.
- Investment Bankers – They are the representative of different companies, a private company who wants to be publicly held at that.
The index of stocks is used in order to know the performance of the stock market since they measure the overall changes in the stock market. There is a wide range of indexes existing today such as the Dow Jones Industrial Average or DJIA which is the best know index all over the world. It is comprised of the 30 largest companies located in the United States and is a price-weighted average.
Benefits of Stock Market
- Allow companies to raise funds through the selling of stocks and corporate bonds
- Investors become part of the financial achievements of the companies
- Provides transparency and equal opportunity to investors
- Give investors an access to a variety of information in as much as they get news and analysis before the public does
The stock market was once associated with the stock exchange where people buy and sell securities. Today, that idea is no longer applicable as the intervention of technology in the life of men changed everything – trading became automated and transactions are done in just a split second.
Learning to invest seems intimidating and exciting at the same time. Being equipped with the necessary knowledge and skills is very important before getting engaged with it in order to avoid great losses.