An Explanation of how Stock Markets Work

A stock market is a marketplace where securities are traded. Stocks of companies (securities) will be available to the general public to buy or sell at an agreed price. This trading is facilitated by various stock exchanges that provide a platform where those in possession of stocks can meet with those who want to buy the same, and trade in a transparent and secure manner.

To put things into perspective, stock markets vary according to the criteria used to define them. On a global basis, there is one global stock market, but on a national basis, the stock market may be  made up of various stock exchanges. For example, in the United States, the stock market  includes the NASDAQ and NYSE.

Stocks traded in a stock market represent unit measurements of a share in a company’s assets and earnings. Companies listed on stock exchanges are considered public because of the fact that they have made their shares available to the public. The reason why companies become public and consequently give a share of ownership to the public is that they need money. Business expansion or even start-up costs of new companies require financial resources, and companies generally have two options to raise money. They can either borrow money (a process called debt financing) or they can sell stock (also known as equity financing). The advantage of selling stock would be that there is less risk and fewer legal obligations. The company would not necessarily be required to pay back the money and the risk of their ventures is spread out among many stockholders.

When the stock of a company is sold to the public for the first time, it is called an initial public offering (IPO). This is usually done by small companies seeking to expand their business.

When a person buys shares of a particular stock, the person is basically buying a share in the ownership of the company associated with that stock. This person is called an investor because he or she would have committed money or capital to the company in anticipation of obtaining additional income or profit.

As with any other market, certain laws and regulations are enforced to ensure that it operates properly. An investor can only trade stocks on the stock market via a broker (either a firm or a registered individual) who executes the trades for him or her.

The prices of stocks fluctuate, but they are mainly affected by a company’s intrinsic value and its perceived market value. The price rises or falls in response to changes in the real value of a company. For instance, when a company acquires new assets or when it makes a profit, the stock price is likely to change. The perceived market value of a stock is mainly determined by the market players (the traders) and is affected by the company’s perceived future. Announcements of the development of new products, changes in the board of directors or even the performance of its competitors can change the value of a stock.

Stock markets also portray the general mood of a nation’s economy. That is why the stock market of a nation is sometimes used to assess the health of its economy. Stock market indexes or baskets of companies’ share prices weighted together are also good indicators of the impact of national policy changes.