Table of Contents
- What Is the Stock Market?
- Key Takeaways
- How the Stock Market Works
- What Are Public Companies?
- Stocks: Buying and Selling Shares
- What Is a Stock Exchange?
- Over-the-Counter Market
- Other Assets Sold on the Stock Market
- Investors and Traders
- Role of Brokers
- Regulators
- How Stock Prices Are Determined
- Market Indexes
- Roles of the Stock Market
- Why Is the Stock Market So Important?
- The Bottom Line
What Is the Stock Market?
Let me explain the stock market directly to you: it's a broad network of exchanges, brokerages, and over-the-counter venues where investors buy and sell shares in publicly traded companies. You might hear people use 'stock market' to mean just the NYSE or Nasdaq, but those are only parts of a larger global system.
In the U.S., the Securities and Exchange Commission regulates companies selling shares to the public, requiring them to register and publish periodic disclosures and financial statements. This keeps things transparent and fair.
Key Takeaways
Companies issue shares on the stock market to raise capital and grow their business. The Securities Exchange Act of 1934 governs secondary market transactions. As an investor, you might buy shares for dividends, voting rights in corporate elections, or to sell them later at a profit.
How the Stock Market Works
When you hear about the stock market, it often points to a specific exchange like the NYSE, but it's really a bigger system including exchanges, brokerages, and OTC markets—anywhere you can buy a piece of a company counts.
In this network, shares are traded under laws that protect against fraud. The stock market moves money between investors and companies, playing a key role in economies.
You might buy stocks for dividends, to profit from price increases, or to influence company decisions through voting at shareholder meetings. Owning shares means you get a portion of profits, often as dividends, and sometimes voting rights.
What Are Public Companies?
Not every company can sell stock publicly; in the U.S., only those registered with the SEC qualify, meeting strict regulations and disclosure rules.
The usual way is through an IPO, but SPACs have become another option in recent years. The primary market involves direct buyers like early investors or underwriters, including private placements without full registration.
Once public, stocks trade in the secondary market on exchanges or OTC. Today, over 58,000 companies worldwide are publicly traded.
Stocks: Buying and Selling Shares
When you buy a stock, you're acquiring a piece of the company, with your ownership fraction based on total shares issued and what you hold.
In small private firms, one share might be significant, but giants like Apple have billions of shares, so yours is a tiny slice. Prices fluctuate with demand from buyers and supply from sellers, and different investors value stocks differently, making predictions tough.
What Is a Stock Exchange?
After going public, shares trade freely on the stock market, mostly on exchanges, though other venues exist. Exchanges are regulated platforms—now mostly virtual—for buying and selling stocks and securities, helping companies raise funds.
Examples include NYSE, Nasdaq, London Stock Exchange, Tokyo, and Shanghai. They have rules for fair trading, transparency with real-time prices, and liquidity so you can buy or sell easily.
Many exchanges cross-list shares, expanding access for companies and investors.
Over-the-Counter Market
You can also trade stocks OTC, directly with another investor via brokers and dealers over networks, without the same regulations as exchanges. This suits smaller companies not meeting exchange requirements, but it means less reliable info for you as an investor.
Other Assets Sold on the Stock Market
Beyond common stocks, exchanges and OTC handle American depositary receipts for foreign shares, derivatives like options and futures based on underlying assets, funds such as mutual funds and ETFs that track indexes or sectors, preferred stocks with fixed dividends and priority, and REITs that invest in real estate and pay out most profits as dividends.
Loosely, bonds (debt securities) and commodities (raw materials or futures) are discussed as part of the stock market, though they have separate markets.
Investors and Traders
Participants include institutional investors like pension funds managing big money, retail investors trading personally via online platforms, and accredited investors with access to complex options.
Investors take a long-term view, focusing on fundamentals to build wealth steadily. Traders, however, seek short-term gains from volatility, using technical analysis, which carries higher risks.
Role of Brokers
Brokers connect you to the markets, buying and selling on your behalf. They range from full-service firms offering advice to discount and online brokers for self-directed trading, plus robo-advisors for automated planning. All are regulated by the SEC and FINRA.
Regulators
Regulations shape what's traded and how; the SEC protects investors and ensures fair markets since 1934. It fights fraud and requires disclosures. Exchanges add their rules, and FINRA oversees brokers. Globally, similar bodies maintain confidence.
How Stock Prices Are Determined
Prices emerge from buyer-seller agreements, influenced by supply and demand. Fundamental factors include company earnings; technical ones involve sentiment and trends. High prices might signal success or events like splits; drops reduce market value but don't erase overall money.
Market Indexes
Indexes like DJIA (30 large companies) or S&P 500 (500 largest) snapshot the market or sectors, serving as benchmarks for your investments.
Roles of the Stock Market
It promotes corporate governance through transparency, acts as an economic indicator, provides investment opportunities with historical returns beating inflation, offers liquidity, enables capital raising without debt, and allocates resources efficiently based on market judgments.
Why Is the Stock Market So Important?
From funding colonial ventures to today's central economic role, the stock market drives financialization, wealth distribution, and affects everyday life through tech funding, jobs, pensions, and more.
The Bottom Line
The stock market is where shares and instruments trade, companies raise funds, and you can grow wealth. It impacts products, jobs, and retirements even if you don't trade directly.
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