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What Is the Stock Market and How Does it Work

The stock market is a term that refers to a collection of markets and exchanges that connect buyers and sellers of shares of publicly-held companies.

It operates like any market. In a normal market, you will have some stalls where you buy all sorts of commodities.

Here you can buy vegetables, meat, clothes, etc.

The stock market operates in almost a similar fashion as you have buyers and sellers selling stock at an agreed price.

The only difference is that in a stock market you will usually have a middleman, a stockbroker, who will assist, the buyer (investor) through the process.

Thus you don’t go directly to the seller in a publicly-traded company i.e. companies trading on the stock exchanges. If it is a private company then you can directly deal with the owers.

So if for instance if you wanted to buy an Apple stock you will have to go through a stockbroker.

The stockbroker will usually charge you a little fee for processing the transaction.

What is the stock market and how does it work

Who regulates the stock market?

The stock exchanges are usually governed by regulations set by a government body such as the Securities and Exchange Commission in America. SEC enforces the federal securities laws.

Why is the stock market important?

The stock market is important because is it is the major source of capital for companies that they can use to fund and expand their businesses.

For example, if a company issues 1000 shares of stock that sell at $10 a share then the company will get an injection of $10,000 into its coffers.

It can then use this $10,000 to buy new equipment and other things to help it grow.

If it was a private company it may have had to find private investors. Finding private investors is not as easy as doing it through the stock market where almost anyone with money can buy shares.

Raising capital is also the most convenient and cheaper way of getting capital other than getting a loan.

If you get a loan then you are subject to interest charges and the risk that if you default they can sell off your assets.

Secondly, it offers an opportunity for investors to own shares of stock in publicly traded companies and share in the profits of those companies through dividends.

The stock market has therefore enabled you and me to be able to own a share of stock of blue-chip companies like Apple and Google.

As a shareholder, the stock market offers a market where you can dispose of your shares if you so wish.

For example, if the share price of your stock rises above the price you bought them you can sell them for a profit.

The stock market offers investors an opportunity to track the value of their shares seen in the eyes of investors.

The value of shares rises and falls depending on how the investors are assessing the present and future performance of companies and also the wider economy.

The history of the Stock market

The stock market has been around since the 1500s and there are many recordings of this in Europe.

However, as far as modern trading is concerned, the first joint-stock company was formed in 1553 in Britain.

It was set up to finance an expedition to the Orient via a northeast passage. Unfortunately, this expedition failed as the crew of two of the ships froze to death in Scandinavia.

One of the ships that survived only managed to go as far as Russia where they signed an agreement with Czar Ivan the Terrible.

The one that has survived the longest is the London Stock exchange which has grown to the size it is known now.

The London Stock Exchange grew out of a coffee house. It eventually grew and moved from there eventually acquiring the name the London Stock Exchange.

In the old days, there were various stock exchanges dotted across the United Kingdom.

These were eventually amalgamated and now operate as one in London.

Technology has made it easy to have a few exchanges located in cities such as New York and London.

Investors do not have to be physically present at the stock exchanges to buy shares they can do it online.

Nowadays there are apps such as Robinhood that can be used to purchase stocks. You can find an analysis of Robinhood here.

Largest stock exchanges by market capitalization

Nowadays almost all countries of the world have stock exchanges. Here are the largest stock exchanges in the world by market capitalization.

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