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Stock Market

What is the Stock Market?

The stock market is where shares of publicly held companies are bought, sold and issued. Such financial activities are managed primarily through electronic institutionalized formal exchanges that must comply to set regulations.

The terms ‘stock market’ and ‘stock exchange’ are commonly used interchangeably, but this is incorrect. Whilst the ‘stock market’ is the general venue where buyers and sellers trade shares, a ‘stock exchange’ is the specific place where they are trading. Leading stock exchanges include the New York Stock Exchange, the Nasdaq, the London Stock Exchange, and the Hong Kong Stock Exchange.

Stock markets and exchanges are important components of a free-market economy. This is because the trading and exchange of capital is made accessible to all kinds of investors and is therefore democratized.

What is the Stock Market’s Function?

  1. From the perspective of companies or organizations the stock market provides access to capital. For example, if a company decides to embark on a new project and needs some liquid cash to fund it, they can sell some of their shares listed on the stock market to access this cash.

  2. Secondly, from the perspective of shareholders the stock market provides the opportunity to participate in a company’s growth. As the valuation of their invested shares increase, the shareholder’s own returns are moving with the fluctuations of the market. They, too, can also convert these shares to cash when desired or when returns are high.

How does the Stock Market Work?

Stock markets acts as primary and secondary markets which provide a safe and controlled environment for partakers to transact in shares without operational risk. As a primary market, the stock market is where companies can issue and sell their shares to the public for the first time through an initial public offering (IPO). This process aids companies in raising essential capital from investors. This process involves the company dividing itself into a number of shares, for example 30 million, and then selling a number of those shares, for example 5 million, to the public for a certain price, for example $10 per share. This takes place on the stock market.

If this process is successful, the company will sell the 5 million shares and collect $50 million of funds. The initial investors will receive shares in the company which they can hold onto for as long as they would like to in hope that the share price rises, and they receive income in the form of dividend payments.

What are Features of the Stock Market?

  1. Fair dealing in securities transactions: Stock markets are required to ensure, through their regulations, that all potential or existing market participants have instant access to buy and sell stocks. It therefore supports the fair and transparent pricing of securities.

  2. Efficient price discovery: Stock markets support reliable methods for price discovery, which is usually the assessing of market supply versus demand as well as other factors associated with the transactions.

  3. Balanced regulations: Companies listed on the Public Stock Exchange are heavily regulated. Exchanges themselves also require certain obligations to ensure that all market participants are notified of corporate occurrences. If the regulations are not adhered to, the exchanges suspend the trading of that company’s shares and may introduce other disciplinary measures.

For More on Stock Markets:

How Does the Stock Market Work by Investopedia

What is the Stock Market and How Does it Work by Nerd Wallet

The Stock Market by the Corporate Finance Institute

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