We all know that a market is where buyers and sellers meet. But what about the Stock Market? What brings buyers and sellers together?
The stock market is a set of exchanges and venues shares of publicly held companies are bought and sold. Many have made a fortune via trading the Stock Market. American billionaire, Warren Buffett is one of the well-known individuals who have made a fortune in the Stock market in five top positions which are Apple Inc. (AAPL), Bank of America Corp (BAC), American Express Company (AXP), Chevron, and The Coca-Cola Company (KO).
In this post, we’ll learn about the STOCK MARKET, and how it works. Let’s get right into it, easy peasy!
What is a Stock Market?
Stock markets are venues where buyers and sellers meet to exchange equity shares of public corporations. It allows buyers and sellers of securities to meet, interact, and transact. The markets allow for price discovery for shares of corporations and serve as a barometer for the overall economy.
Buyers and sellers are assured of a fair price, a high degree of liquidity, and transparency as market participants compete in the open market. The financial activities are conducted through formal exchanges and via over-the-counter (OTC) marketplaces that operate under a defined set of regulations.
In the US, for example. the U.S. stock market is regulated by the Securities and Exchange Commission (SEC) and other local regulatory bodies. The first stock market was the London Stock Exchange which began in a coffeehouse, where traders met to exchange shares, in 1773. Today, the leading Stock in the United States include the New York Stock Exchange (NYSE) and the Nasdaq.
Most nations have a stock market, and each is regulated by a local financial regulator or monetary authority, or institute. Companies listed on the stock market exchanges are regulated, and their dealings are monitored by the SEC. In addition, the exchanges set certain requirements such as mandating timely filing of quarterly financial reports and instant reporting of relevant corporate developments, to ensure that all market participants are equally informed.
Failure to adhere to the regulations can lead to suspension of trading and other disciplinary measures.
How does the Stock Market Work?
As stated earlier, the stock market is regulated by a financial regulator which plays a big role in the functions of the Stock Market. It, therefore, works in two ways 1. As a Primary Market 2. As a Secondary Market.
The stock market allows companies 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 divides itself into several shares and sells some of those shares to the public at a price per share. To make this happen, a company needs a marketplace where these shares can be sold and this is achieved by the stock market.
A listed company may also offer new, additional shares through other offerings at a later stage, such as through rights issues or follow-on offerings. They may even buy back or delist their shares. Investors will own company shares in the expectation that share value will rise or that they will receive dividend payments or both.
The stock exchange acts as a facilitator for this capital-raising process and receives a fee for its services from the company and its financial partners.
In this case, using the stock exchanges, investors can also buy and sell securities they already own.
Functions of a Stock Market
1. Ensures price transparency, liquidity, price discovery, and fair dealings in trading activities.
2. Guarantees all interested market participants have access to data for all buy and sell orders, thereby helping in the fair and transparent pricing of securities.
3. Ensures efficient matching of appropriate buy and sell orders.
Who are the Traders in a Stock Market?
Traders on the stock market include market makers, investors, traders, speculators, and hedgers.
Investors– They may buy stocks and hold them for the long term.
Traders- They may enter and exit a position within seconds.
Market makers– They provide necessary liquidity in the market.
Hedgers- They may trade in derivatives.
The stock market is a component of a free-market economy. It allows companies to raise money by offering stock shares and corporate bonds and allows investors to participate in the financial achievements of the companies, makes profits through capital gains, and earn income through dividends.
The stock market works as a platform through which the savings and investments of individuals are efficiently channelled into productive investment opportunities and add to the capital formation and economic growth of the country.
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