Last updated on October 3, 2023
The stock market is where people buy and sell parts of companies they can own. This happens on exchanges or through regulated marketplaces. Big U.S. exchanges are NYSE and Nasdaq. It helps people trade and invest, making economies work.
Key points to consider:
- Stock markets bring together buyers and sellers to trade shares of public companies.
- They are essential in a free-market economy, allowing widespread participation and capital exchange.
- Stock markets ensure fair pricing and smooth transactions.
- The U.S. stock market is overseen by the SEC and local regulators.
| Topic | Key Points |
|---|---|
| What Is the Stock Market? | – Stock markets are where shares of public companies are bought and sold. |
| – Exchanges and over-the-counter (OTC) marketplaces are used for trading. | |
| – Key U.S. stock exchanges: NYSE and Nasdaq. | |
| Understanding How It Works | – Stock markets provide a secure environment for trading securities. |
| – Primary market: IPOs for companies to raise capital. | |
| – Secondary market: Buying/selling securities after IPO. | |
| – Stock market facilitates price discovery, liquidity, and fair dealings. | |
| What Are the Functions of a Stock Market? | – Ensures price transparency, liquidity, and fair dealings. |
| – Supports efficient matching of buy and sell orders. | |
| How Stock Markets Are Regulated | – Regulated by local financial authorities. |
| – SEC oversees U.S. stock market, ensuring fair, efficient, and informed trading. | |
| – Companies must adhere to regulations set by exchanges and the SEC. | |
| Significance of the Stock Market | – Allows companies to raise capital and investors to participate. |
| – Investors make profits from capital gains and dividends. | |
| – Efficiently channels savings into investments, promoting economic growth. | |
| Alternate Trading System | – Alternate trading systems match large buy/sell orders, not as regulated. |
| – Examples: dark pools, some cryptocurrency exchanges. | |
| Who Helps Investors Trade? | – Stockbrokers buy/sell stocks; portfolio managers invest for clients. |
| – Investment bankers assist companies in IPOs, mergers, acquisitions, etc. |
What you'll learn:
➤ Understanding the Stock Market
The stock market is like a place where people buy and sell pieces of companies. It helps find the right prices for these company shares and shows how well the economy is doing. It’s a fair and open place where buyers and sellers compete, and everyone can easily buy or sell.
Long ago, in 1773, the London Stock Exchange started in a coffeehouse where traders met to trade shares. Then, in 1790, the first U.S. stock exchange began in Philadelphia. Wall Street in New York City began with an agreement signed by 24 traders under a buttonwood tree in 1792. They later called it the New York Stock and Exchange Board.
The stock market is controlled and watched over. In the U.S., the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) make sure things are fair.
In the past, people used paper certificates to trade. Now, stock markets work electronically.
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➤ How the Stock Market Works
Stock markets are safe places where people can buy and sell shares and other financial things with confidence. They follow rules set by regulators to make sure things are fair and safe.
Companies use the stock market to sell their shares to the public for the first time. This is called an initial public offering (IPO). It helps companies get money from investors. Companies divide themselves into shares and sell them to the public at a price per share.
Later on, companies can also sell more shares or even buy back their shares. Investors buy shares, hoping their value will go up, and they might get paid dividends.
The stock exchange helps with this process and gets paid for its help. People can also buy and sell things they already own in the stock market.
The stock market keeps track of how well the market is doing with indicators like the S&P 500 index and the Nasdaq 100 index.
➤ Functions of a Stock Market
The stock market does important things like making prices clear, helping trades happen easily, finding fair prices, and making sure things are done fairly.
The stock market makes sure that everyone can see the prices for buying and selling things, so prices are fair. It also helps match people who want to buy with people who want to sell.
The stock market figures out fair prices by looking at what everyone is willing to pay and sell for. People who trade on the stock market include those who hold stocks for a long time, those who quickly buy and sell, and those who provide liquidity or trade in things related to stocks.
➤ How Stock Markets Are Regulated
In different countries, there are stock markets, each watched over by a local financial authority. In the U.S., the SEC is in charge of overseeing the stock market.
The SEC is a separate agency from the government that’s focused on safeguarding investors, keeping markets fair, orderly, and efficient, and supporting capital formation.
Companies listed on stock exchanges are regulated by the SEC. Exchanges also set rules, like requiring companies to report their financial info on time and quickly share important news. Not following these rules can lead to trading being stopped and other punishments.
➤ Stock Market FAQ
Why Is the Stock Market Important?
The stock market is part of a free-market economy. It lets companies raise money by selling shares and bonds, while investors can make money from company successes. It helps people’s savings become investments that support the economy’s growth.
What’s an Alternate Trading System?
Alternate trading systems match big buy and sell orders. They’re not as controlled as exchanges. Dark pools and some cryptocurrency exchanges are examples, operating in private groups.
Who Helps Investors Trade?
Stockbrokers help people buy and sell stocks, and portfolio managers handle investments for clients. Investment bankers assist companies in different ways, like guiding private companies to go public or working on mergers and acquisitions.
➤ 5 Popular Investing Quotes
We don’t have to be smarter than the rest. We have to be more disciplined than the rest.
— Warren Buffett
Anyone who is not investing now is missing a tremendous opportunity.
— Carlos Slim
Successful investing is about managing risk, not avoiding it.
— Benjamin Graham
People don’t like the idea of thinking long term. Many are desperately seeking short term answers because they have money problems to be solved today.
— Robert Kiyosaki
The world belongs to optimists; the pessimists are only spectators.
— Francois Guizot
Sources:
- FINRA. “Advancing Market Regulation and Transparency.”
- U.S. Securities and Exchange Commission. “About Trading and Markets.”
- London Stock Exchange. “Our History.”
- Pennsylvania Magazine of History and Biography. “The Philadelphia Stock Exchange and the City It Made.”
- U.S. Securities and Exchange Commission, Historical Society. “The Institution of Experience: Self-Regulatory Organizations in the Securities Industry, 1792–2010.”
- CFA Institute. “Chapter 15, The Functioning of Financial Markets.”
- Modern Markets Initiative. “Fair and Efficient Markets.”
- U.S. Securities and Exchange Commission. “What We Do.”
