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How does the Stock Market Function?

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  • Written By: Michael Totten
  • Edited By: Lucy Oppenheimer
  • Last Modified Date: 16 November 2016
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The stock market is a market where people buy and sell parts of companies. The parts being bought and sold are a financial interest in the company called stocks. The companies involved must be publicly held companies, which means that they have to be companies that sell stocks to public investors on an open market.

Companies that sell stocks to investors usually do so in order to raise capital. The capital is then used for things such as financing current operations and paying for expansion plans. If the company is able to turn the capital into profits, a share of the profits is passed on to investors. Similarly, if the company loses money, investors share the loss.

The stock market is simply a central place where people come together to buy and sell stocks. However, the stock market is not a store or a single building. It doesn't really have a physical location. However, when people think of the stock market they typically think of Wall Street or the New York Stock Exchange, also known as the NYSE. These places do not encompass the entire stock market, but they are locations where much of the activity in the stock market occurs.

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The NYSE is perhaps the principal stock exchange in the world. Not all companies’ stocks are traded in the NYSE, but it is the trading home of some of the most impressive and well-respected companies in the world. To purchase stocks of these companies on the floor of the NYSE, investors need a substantial amount of assets to invest. Nevertheless, the small investor can obtain less expensive investing through brokers, including online companies. With a small balance, online brokers allow investors to bypass the trader on the NYSE floor, and make electronic purchases and sales on their own.

An important aspect of the stock market is that it is made up of a primary market and a secondary market. The primary market is where securities are sold for a company’s initial public offering, known as the IPO. The IPO is the base price used when a private company makes the first sale of its stock to the public. After doing so, it becomes a publicly held company. It is a much less active market than the secondary market, which is where investors trade in companies that are already publicly held. The stock market primarily deals with the secondary market.

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anon106353
Post 3

Is the story continued somewhere? I wanted to know how it worked, not what it was. For example, if there is a series of bids and asks running up and down the various price levels, then how does the exchange decide which way to tick? Or what does the structure of the broker/dealer network look like? How/where are orders routed for processing? I guess i have to keep looking. --Wannabe Trader

anon22701
Post 2

When is the stock market open and closed for trading stock in Pacific time and what does after hours mean?

malena
Post 1

The NASDAQ (National Association of Securities Dealers Automated Quotations) is another major stock exchange -- an American stock exchange. The Johannesburg Securities Exchange, London Stock Exchange, Sao Paulo Stock Exchange, Tokyo Stock Exchange and Toronto Stock Exchange are some other major stock exchanges in the world.

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