What Is the Stock Market and How Does it Work?

Overview of the Stock Market

• Definition: An exchange mechanism for buying and selling shares in publicly traded companies.
• Function: Helps businesses raise capital and serves as an economic indicator.
• Key Components: NYSE, NASDAQ, and electronic trading.

Key Takeaways

• Public Companies: Must be public to list shares; subject to transparency regulations.
• SEC Regulation: Oversees U.S. stock market, ensuring fair trading practices.
• Investor Diversity: Includes institutional investors, high-net-worth individuals, and retail investors.
• Stock Prices: Influenced by demand, company performance, economic conditions.
• Purpose of Owning Stocks: Income from dividends, potential for price appreciation, shareholder voting rights.

How the Stock Market Works

Stock Market Structure

• Public Companies: Companies offer shares via IPOs; must meet regulatory requirements.
• Primary Market: Initial sales of securities directly by companies.
• Secondary Market: Trading of existing stocks between investors, typically on exchanges.

Buying and Selling Shares

• Ownership: Buying shares means owning part of a company, with rights to dividends and voting.
• Example: Apple Inc. has billions of shares in circulation.

Stock Exchanges

• Function: Platforms like NYSE and NASDAQ facilitate buying and selling of stocks.
• Role: Provide liquidity and transparency in trading.
• Global Reach: Includes exchanges in London, Tokyo, Shanghai.

Over-the-Counter Market (OTC)

• Definition: Trading outside of formal exchanges, less regulated.
• Purpose: Typically for smaller, less liquid companies.

Other Assets in the Stock Market

• American Depositary Receipts: U.S. traded shares of foreign companies.
• Derivatives: Includes options and futures, dependent on underlying asset values.
• Funds: Mutual funds, ETFs, preferred stocks, REITs.

Participants in the Stock Market

Investors and Traders

• Investors: Long-term focus, looking for growth over time.
• Traders: Short-term focus, capitalize on market volatility.

Role of Brokers

• Function: Facilitate buying/selling of securities for clients.
• Types: Full-service and discount brokers.
• Online Platforms: Increasingly popular for their convenience and lower costs.

Regulators

• SEC: Ensures fair, efficient markets, prevents fraud.
• FINRA: Focuses on retail investor protection.

Stock Prices and Market Indexes

Determination of Stock Prices

• Factors: Company performance, market sentiment, technical analyses.
• Influences: Economic events, interest rate changes, geopolitical issues.

Market Indexes

• Examples: DJIA, S&P 500.
• Purpose: Act as benchmarks for market and portfolio performance.

Roles and Importance of the Stock Market

Functions

• Corporate Governance: Increased transparency and accountability.
• Economic Indicator: Reflects economic health.
• Investment Opportunities: Platform for growth and wealth building.
• Liquidity: Easy buy/sell of shares.

Importance

• Global Economy: Central to financialization and investment strategies.
• Impact on Society: Affects retirement planning, technological advancement, and economic growth.

Difference from Bond Market

• Bond Market: Larger, involves debt securities with regular interest payments.
• Stock Market: Involves equity ownership with potential for higher returns.

Conclusion

• Summary: Stock market is essential for raising capital, investing, and economic health.
• Influence: Affects employment, technological advances, and public services.