Stock Market: How Does the Work? Detailed Guide
What is the Stock Market?
Definition: It is a trading platform for public companies listed on the Stock Exchange. IPOs are primary market offerings where companies raise capital by selling shares to the public.
It is common to use the terms “stock market” and “stock exchange” interchangeably. Shares are bought and sold on one or more of the stock exchanges that make up the overall stock market.
Understanding the Stock Market
Before understanding the stock market, you need to know who invented the stock market: Dutch East India Company became the first publicly traded company in Amsterdam and created modern stock trading. Stocks were sold by the company and dividends were paid to investors to raise capital. In 1611, the Amsterdam stock exchange was established. Trading shares of the Dutch East India Company dominated the exchange for many years.
The stock market facilitates the exchange of securities between buyers and sellers. The markets serve as a barometer for the overall economy and allow for the discovery of share prices. As market participants compete in an open marketplace, sellers and buyers are assured of fair prices, liquidity, and transparency.
In 1773, traders met in a coffeehouse to exchange shares, which led to the creation of the London Stock Exchange. Philadelphia became the first stock exchange in the United States in 1790.
As a result of the Buttonwood Agreement, which was signed under a buttonwood tree, New York’s Wall Street was born in 1792.
The agreement was signed by 24 traders and was the first of its kind in the United States. In 1817, the traders renamed their venture the New York Stock and Exchange Board.
Different Types of Stocks to Invest in
One of the most important paths to financial success has historically been investing in stocks. When researching stocks, you’ll often hear different categories and classifications of stocks discussed. The following are the major types of stocks you should be aware of.
- Common stock
- Preferred stock
- Large-cap stocks
- Mid-cap stocks
- Small-cap stocks
- Domestic stock
- International stocks
- Growth stocks
- Value stocks
- IPO stocks
- Dividend stocks
- Non-dividend stocks
- Income stocks
- Cyclical stocks stocks
- Non-cyclical stocks
- Safe stocks
- ESG stocks
- Blue chip stocks
- Penny stocks
Difference Between Common Stock and Preferred Stock
The preferred stock of a company has priority over its income but does not provide its holders with voting rights.
How the Stock Market Works
When you buy stock in a public company, you are buying a small part of that company. Shares of a company’s stock are listed on an exchange through a process called an initial public offering (IPO). You may have heard of the New York Stock Exchange or Nasdaq. Investors buy these shares, which allows the company to raise funds to grow its operations. Investors can then buy and sell those shares among each other.
Buyers offer a “bid,” or the higher amount they are willing to pay, which is generally lower than the amount of sellers “ask” in return. That difference is called a bid-ask spread. For a trade to occur, a buyer must increase his price or a seller must decrease his price.
All this may seem complicated, but computer algorithms generally do most price-fixing calculations. When buying stocks, you will see bids, requests and bid-ask spreads on your broker’s website. But in many cases, the difference will be a few pennies, and will not be very worrying for novice and long-term investors.
What Are the Functions of a Stock Market?
- Economic Barometer
The economic barometer measures consumer and producer sentiment based on factors such as GDP growth and unemployment rates.
- Pricing of Securitie
Using demand and supply factors, the stock exchange values securities. Growth-oriented companies tend to offer securities with a higher value than other companies. Investors, creditors, and government agencies can all function efficiently when securities are priced appropriately.
- Safety of Transactions
In the stock market, only listed securities are traded and the names of companies are included in the trade list only after the authority has verified their soundness. Listed companies must also abide by strict rules and regulations. The stock exchange ensures the safety of trades.
- Spreading Equity Culture
By regulating new issues, improving trading practices, and educating the public about investment, the stock exchange encourages people to invest in ownership of securities.
- Contributes to Economic Growth
A stock exchange is a marketplace where securities of various companies can be bought and sold. As a result of this process of disinvestment and reinvestment, capital is created and economic growth occurs.
- Liquidity
It is possible for banks to invest their idle funds in the stock market and earn profits within a short period of time. Whenever funds are needed, these securities can be sold immediately. Stock exchanges provide opportunities for converting securities into cash within a short period of time.
- Promotes the Habits of Savings and Investment
Investing in the stock market offers investors a variety of investment opportunities. These opportunities motivate investors to increase their savings and invest in corporate securities rather than unproductive assets like gold, silver, and other metals.
- Better Allocation of Capital
Shares of profit-making companies are quoted higher and are actively traded, which makes it easy for such companies to raise fresh capital on the stock market. Loss-making companies are hesitant to sell their securities to the general public. Stock exchanges therefore facilitate the allocation of investors’ funds to profitable channels.
- Provides Scope for Speculation
The stock market allows healthy speculation of securities to ensure liquidity and demand.
You must know these top stock market functions. Stock markets play an important role in a country’s economy and contribute to its economic growth. Investing in securities also helps businesses raise capital for their operations and growth.
Investing vs. Trading: What's the Difference?
| Investing | Trading |
|---|---|
| Long Term | Short Term |
| Value | Price |
| Fundamentals | Technicals |
| Risks | P/L |
| Goals | Borrow |
| Save | Want |
| Need | Noise |
| Signal |
What Time Do Stock Markets Open?
| # | List of Stock Exchanges | Opening Time and Closing Time (local time) | Days | Region |
|---|---|---|---|---|
| 1 | New York Stock Exchange | 09:30 To 16:00 | Monday To Friday | United States |
| 2 | Nasdaq Stock Market | 09:30 To 16:00 | Monday To Friday | United States |
| 3 | Shanghai Stock Exchange | 09:30 To 15:00 | Monday To Friday | China |
| 4 | Euronext Paris Exchange | 09:00 To 17:30 | Monday To Friday | Europe |
| 5 | Shenzhen Stock Exchange | 09:30 To 15:00 | Monday To Friday | China |
| 6 | Japan Exchange Group | 09:30 To 15:00 | Monday To Friday | Japan |
| 7 | Hong Kong Stock Exchange | 09:30 To 16:00/16:08–16:10 | Monday To Friday | Hong Kong |
| 8 | Bombay Stock Exchange | 09:15 To 15:30 | Monday To Friday | India |
| 9 | National Stock Exchange | 09:15 To 15:30 | Monday To Friday | India |
| 10 | London Stock Exchange | 08:00 To 16:30 | Monday To Friday | United Kingdom |
| 11 | Saudi Stock Exchange (Tadawul) | 10:00 To 15:00 | Sunday To Thursday | Saudi Arabia |
| 12 | Toronto Stock Exchange | 09:30 To 16:00 | Monday to Friday | Canada |
How Stock Markets Are Regulated
Stock markets are common in most countries, and each is regulated by a local financial regulator or monetary authority. Here we have given a chart of the top 12 countries’ stock market regulated. Using a search engine like Google or Bing, you can find out more about the rest of the country.
“Search Term: Who Regulates the ‘Country Name’ Stock Market”
| # | Stock Market is Regulated by the Country | Regulated |
|---|---|---|
| 1 | New York Stock Exchange | Securities and Exchange Commission (SEC) |
| 2 | Nasdaq Stock Market | U.S. Securities and Exchange Commission |
| 3 | Shanghai Stock Exchange | China Securities Regulatory Commission (CSRC) |
| 4 | Euronext Paris Exchange | MIFID II, MIFIR and the French Monetary |
| 5 | Shenzhen Stock Exchange | China Securities Regulatory Commission (CSRC) |
| 6 | Japan Exchange Group | Japan Exchange Regulation (JPX-R) |
| 7 | Hong Kong Stock Exchange | Securities and Futures Commission (SFC) |
| 8 | Bombay Stock Exchange | Securities and Exchange Board of India (SEBI) |
| 9 | National Stock Exchange | Securities and Exchange Board of India (SEBI) |
| 10 | London Stock Exchange | Financial Conduct Authority (FCA) |
| 11 | Saudi Stock Exchange (Tadawul) | Capital Market Authority (CMA) |
| 12 | Toronto Stock Exchange | Investment Industry Regulatory Organization of Canada (IIROC) |
FAQ
- Why Invest in the Stock Market?
Most investors invest in stocks because of the potential return compared to alternatives such as bank certificates of deposit, gold, and Treasury bonds. Stock investors who stick with stocks for a long time, say 15 years, are generally rewarded with positive returns. It is true that stock prices fluctuate both up and down.
- Difference Between Stock Market And Share Market?
The two terms stocks and shares are commonly confused, especially by new investors, so let’s look at them first. The main difference between a stock and a share is that a stock conveys ownership in a company, whereas shares represent individual ownership units.
- Forex vs Stocks: What are the Differences?
Forex Market: Forex market is where currencies are bought and sold.
Stock Market: A stock market is a place where stocks (shares of the company) are Buy and Sell.