The market, specifically the stock market, works as a network where investors buy and sell shares of publicly traded companies. It consists of two main parts: the primary market, where companies issue new shares to raise capital (often through an initial public offering or IPO), and the secondary market, where investors trade existing shares among themselves
. Here is how the stock market functions:
- Shares and Ownership: When you buy a stock, you purchase a small ownership stake in a company. This ownership may come with voting rights and the potential to earn dividends, which are portions of the company’s profits paid to shareholders
- Exchanges and Trading: Stocks are traded on exchanges like the New York Stock Exchange (NYSE) or Nasdaq, which provide the infrastructure for orderly trading. Trades are mostly electronic today, with sophisticated systems matching buyers and sellers almost instantly
- Price Determination: Stock prices are set by supply and demand dynamics. Buyers place bids (the highest price they are willing to pay), and sellers set asks (the lowest price they are willing to accept). The difference is called the bid-ask spread. Prices fluctuate as investors react to company news, economic indicators, political events, and market sentiment
- Market Participants: The market includes individual investors, institutional investors (like mutual funds and pension funds), traders, market makers who provide liquidity, and brokers who facilitate transactions
- Regulation: The Securities and Exchange Commission (SEC) regulates the market to protect investors, ensure fair and orderly trading, and promote transparency. Public companies must disclose financial information regularly to maintain accountability
- Economic Role: The stock market enables companies to raise capital for growth and allows investors to potentially profit from the success of these companies. It also acts as an economic indicator, reflecting overall investor confidence and economic health
In summary, the stock market operates as a complex, regulated system where ownership shares of companies are issued and traded, with prices driven by supply and demand, facilitating capital flow and investment opportunities in the economy
