What Is the Stock Market?

The phrase "stock market" describes a number of marketplaces where shares of publicly traded corporations are purchased and sold. Both official exchanges and over-the-counter (OTC) markets that follow strict guidelines are used for these kinds of financial transactions. 

It's common to use the terms "stock market" and "stock exchange" interchangeably. On one or more of the stock exchanges that make up the larger stock market, traders in the stock market purchase or sell shares.

The New York Stock Exchange (NYSE) and the Nasdaq are two of the major American stock exchanges. 

Understanding the Stock Market

Securities buyers and sellers can meet, communicate, and deal on the stock market. The markets function as a gauge for the state of the economy as a whole and enable price discovery for company shares. A fair price, great liquidity, and transparency are guaranteed to buyers and sellers as players in the open market compete. 

The London Stock swap was the first stock market, having started in 1773 as a meeting place for businessmen to swap shares over coffee. In 1790, the United States' first stock market opened for business in Philadelphia. Wall Street in New York began in 1792 with the signing of the Buttonwood Agreement, so named because it took place beneath a buttonwood tree. 24 dealers signed the pact, making it the first American organization of its kind to trade in securities. The traders renamed their venture the New York Stock and Exchange Board in 1817.

A stock market is a controlled and regulated setting. The Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) are the two primary regulatory bodies in the United States. 

Physical share certificates on paper were issued and traded in the first stock markets. Stock markets run electronically these days.

The Stock Exchanges' Historical Evolution 

When Venetian lenders began offering debt issues to different investors and lenders in the 1300s, stock exchange history began. They played a similar role as the brokers. Every transaction was documented by the Venetians. It appears that Belgium established the first exchange in the 1500s. Called "Sans the Stock," it made bond and promissory note trading easier. 

Throughout the 1600s, East India Company issued stocks to raise money for the sea journey, which was a risk. The investment was subject to weather turmoil, pirate invasions, and loss of direction. Nevertheless, the investors were promised a percentage of sales if the ship reached its destination.

Eventually, a well-organized stock market was created in 1791. The National Association of Securities Dealers Automated Quotations (NASDAQ) and the US stock exchange were established. It features an electronic trading system and trades a wide range of securities. The highly developed New York Stock Exchange (NYSE), established in 1793, was one of its rivals. The NYSE made international securities trading much easier. 

The Workings of the Stock Market

Market participants can trade shares and other qualifying financial products in a safe, regulated environment with little to no operational risk on the stock market. The primary and secondary stock markets function under the regulations set forth by the regulatory body. 

The stock market, as a major market, enables corporations to issue and sell their shares to the public for the first time through the process of an initial public offering (IPO). This activity helps companies raise necessary capital from investors.

A company that splits up into multiple shares sells some of those shares to the public at a price per share. In order to make this process easier, the company needs a place where these shares can be sold, which is provided by the stock market. A company that is listed may also offer additional shares later on through other offerings, like rights issues or follow-on offerings, or they may decide to buy back or delist their shares. Investors own company shares with the hope that the value of their shares will increase or they will receive dividend payments, or both. The stock exchange serves as a facilitator for this capital-raising process and gets paid a fee by the company and its financial partners. Using the stock exchanges, investors can also buy and sell securities they already own in what is called the secondary market.

The stock market or exchange maintains various market-level and sector-specific indicators, like the S&P (Standard & Poor’s) 500 index and the Nasdaq 100 index, which provide a measure to track the movement of the overall market.

What Roles Do Stock Markets Play? 

Price discovery, liquidity, price transparency, and fair dealings in trading operations are all guaranteed by the stock market.

The stock market helps ensure that securities are priced fairly and transparently by providing data for every buy and sell orders to interested parties. Additionally, the market makes sure that the right purchase and sell orders are matched efficiently. 

Price discovery, in which all stock buyers and sellers work together to determine a stock's price, is a function that stock markets must support. Orders should be placed instantly by those who are competent and eager to trade, and the market will make sure that the orders are filled at a reasonable price. 

Investors, traders, speculators, market makers, and hedgers are examples of stock market traders. An investor may buy stocks and hold them for the long term, while a trader may enter and exit a position within seconds. A market maker provides necessary liquidity in the market, while a hedger may trade in derivatives.

How Regulation Affects Stock Markets 

The stock markets in the majority of countries are overseen by a local financial regulator, monetary authority, or institution. The regulatory agency in charge of keeping an eye on the American stock market is the SEC.

As a federal agency free from political influence and the political branch, the SEC operates autonomously. "Protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation" is the SEC's stated objective. 

Businesses that are listed on stock exchanges are subject to regulations, and the SEC keeps an eye on their transactions. To guarantee that all market participants are similarly informed, the exchanges also impose certain standards, such as the necessity to file quarterly financial reports on schedule and to notify pertinent company happenings instantly. 

Inability to adhere to the regulations can lead to suspension of trading and other disciplinary measures.

What Role Does the Stock Market Play? 

A free-market economy includes the stock market as one of its elements. Businesses can raise cash through the sale of corporate bonds and stock shares, and investors can partake in the firms' financial successes, profit from capital gains, and receive dividend payments. Through the stock market, people's savings and investments are effectively directed toward profitable ventures, contributing to the nation's capital development and economic expansion.

Categories 

Four additional categories are used to further categorize stock markets:

• Dealer Market: A market in which dealers determine prices by announcing the purchase or sale of securities at a fixed amount. This kind focuses on market movement and efficiency.
• Auction Market: In such a marketplace, the price is determined by the highest bid made by a broker and the lowest selling price that the seller accepts.
• Over-the-Counter Exchange: Broker-dealers can trade securities on the OTC exchange. These stocks are excluded from the main stock markets. Securities are sold over the counter by companies whose securities are not listed. 
• Electronic Exchange: Using a virtual trading platform, this is a direct selling and buying of assets. The market makers are not involved in this. The brokering function is performed by the Electronic Communication Network (ECN). Nowadays, virtually every stock market has an electronic trading platform. 

An Alternative Trading System: What Is It? 

Unlike exchanges, alternative trading systems are unregulated platforms for matching big buy and sell transactions. A lot of bitcoin exchanges and dark pools are private securities markets or exchanges as well as deal in currencies and work in private groupings.

Who Assists in Stock Market Trading for Investors?

Stockbrokers purchase and sell stocks on behalf of investors, serving as middlemen between stock exchanges and investors. Portfolio managers are experts in investing client portfolios, which are collections of securities. Investment bankers act as a company's representative in a variety of contexts, including ongoing mergers and acquisitions or private businesses looking to go public through an initial public offering (IPO).