The Stock Market – A Quick Run-Through

What, exactly, is the stock market? How does a stock market operate?

In this day and age, there are still people who have heard about the stock market but are really clueless on the many things connected with it. The following are some definitions and short explanations about the stock market and its various features.

Stock market

Also known as the equity market, the stock market is one of the many vital areas of a country’s economy. Its main function is to provide companies access to capital and investors.

The investors, on the other hand, want a slice of ownership of a company with an eye for potential gains hinged on the future performance of the company.

Stocks and ownership

Basically, a stock is a share in the ownership of a company, and a claim to a part of the company’s assets and earnings. Consequently, the more stocks (or shares or equity) you have, the bigger your ownership stake in the company becomes.

Having some of the company’s stocks means you are one of the many owners (or shareholders) of the company. Technically, you own a very small piece of everything the company owns including its furniture and equipments, its contracts and also its debts.

As owner, you are entitled to your share of the company’s earnings. Some types of stocks also entitle you to some voting rights.

Stock exchanges

These are the entities (corporations or organizations) where the stocks are listed and traded. Their business is to bring buyers and sellers of stocks together, thus providing a marketplace (real and virtual) where real-time trading information is exchanged.

Stock market participants can be small individual stock investors or large hedge fund traders and their orders are taken care of by professional brokers who execute them.

Some exchanges are physical locations with trading floors where bids and offers are entered verbally. Other exchanges are virtual network of computers where trading is done electronically from traders at their computer terminals.

Trading

Trading is done when a potential buyer bids for a specific price for a stock and a potential seller asks a specific price for the stock.

Buying or selling at market means there is acceptance to the bid price or ask price for a stock. When there is a match between bid and ask prices, a sale takes place.

This is usually on a first-come-first-served basis, which works fine because sometimes there are multiple bidders or askers for the same price.

In the United States, all stock market trading includes all those listed in such exchanges as the NYSC, NASDAQ and AMEX, including the other regional exchanges like the OTCBB, and Pink Sheets. Other countries have their own stock exchanges.

Types of exchanges

The trading at the New York Stock Exchange is a physical one, the trading being done on a face to face basis on the trading floor. (This is sometimes called “listed” exchange because only stocks listed with the exchange may be traded.)

At the NASDAQ, all the virtual trading is done over a computer network. The trading procedure is the same as that at the NYSE. The seller gives out the asking price and the buyer provides the bidding price, after which both buyers and sellers are matched electronically.

That, in a nut shell, is how a stock market operates.