Whenever you will read about what the stock market is, you will come across definitions like these;
“The stock market is an institutionalized framework formalized for a collection of international markets and exchanges, facilitating interchangeable transactions of financial securities between burgeoning corporates, institutions and private entities while equilibrating equity of information allocation and prohibition of its exploitation.”
Chances are that you could not understand this corporate stock-savvy jargon and you are not alone. Many people are not aware of what the stock market does. This is because the definitions and explanations surrounding the world of the stock market are still implied with very technical words just like the one above. This makes it sound like something a common person probably won’t understand and will have a hard time figuring out.
How to grasp the concept behind what is the stock market?
We like to rephrase the question “What is the stock market” to “what do you actually do in a stock market?” which will make it better for you to grasp the concept.
Well, the stock market helps you with making investments in companies in order to have the potential to increase your net worth and profitability. And by you, we mean anyone in the public who wants to invest in a company or companies. This is actually great for companies that are looking for investments to boost their company but may be turned down by financial institutions and entities like the bank.
What’s remarkable is that if these companies that you have invested in start churning up more profit and revenue, this can actually lead to you gaining more returns on your investment. However, the opposite is also true. If a company’s financial performance is poor, or it is going into a loss for some reason, your investment will have to bear those losses.
So, now that you know what a stock market does, we can now define what it actually is. The stock market is a market space where it introduces both the investors like you and the companies that want investment. What it facilitates is the sale and purchase between both the investors and the companies. But how are investments sold and bought between these two entities in the market?
The answer is one simple word called stocks.
What is stock in the stock market?
To explain what a stock is, we need to introduce the key component and key players in the stock market.
Let’s start with the key component in the stock market, stocks. A stock is the financial medium of exchange through which the investors and companies execute the transaction of investments.
The stock represents the portion of equities of a company or simply a small portion of a company that investors can buy and have ownership of. The investment in a company occurs when the stock that the company puts out is bought by the investors. Investors invest in a stock of a company, and in return get shares of the stock which are equal to the money invested. A share is the unit of stock that is bought, and they price it according to how much the demand of the stock is valued by the public.
We will explain stocks in more detail once we address the key players in the stock market.
What are the key players in the Stock Market?
The key players in the stock market include;
- Company’s stock
Let us find out who they are;
Who are Buyers – investors?
As we mentioned before, Investors or buyers can be both individuals like you or institutional investors who aim to invest in the company’s stock.
Who are sellers and companies?
Sellers are companies that can be of any size and industry, who are seeking investments for their business. These companies place a percentage of their business ownership as stock or equity. Units of the stock are called shares, which are then bought by investors. The companies gain investment in return for exchanging a portion of ownership of their stock to the investors.
What do stock exchanges do?
Stock Exchange is the actual platform where the sale and purchase of stock transactions take place between investors and companies. It is a regulatory body that lists a lot of companies. A company can be listed on a stock exchange if it meets the eligibility criteria and requirements of the stock exchange. These requirements include information on the financial activities of the company and compliance with the rules of the stock market. There are many types of stock exchanges and all of them are important role-players in the stock market.
We will talk further about the workings of the stock exchange after we explain the key players.
Let’s now find out who are regulators?
Financial regulators are the entities and agents that govern the financial market. These are usually government bodies and autonomous financial institutes that ensure everyone in the stock market is trading fairly. Regulators mainly do this by making sure that the availability of information on companies for investment decisions is general information available to everyone in public. This is done to make sure that there is no exploitation and illegal investments made between traders and companies.
So, who are traders?
Traders are also sort of investors or institutional investors whose primary job is to trade stocks. They engage in buying and selling of stock in different companies. This is done by traders with the aim to profit off of short-term gains from stock price fluctuations.
And finally, we ask who brokers are?
Brokers are the intermediaries between an investor and a securities exchange. These can be individuals and firms who buy and sell a stock for you in the stock exchange.
Now let’s figure out how all of these players and component fits together in the stock market.
So how do stocks and stock exchanges interact in the stock market?
Stock exchanges are one of the major platforms for the stock market. A company makes its stock available to the general public for investment by listing itself on the stock exchange. Once listed on the exchange, the company releases a public offering. An offering is where the company releases a portion of its total shares in the market. These shares are set at a specific price for the public to buy. Once this offering is bought by public investors and traders, it is then frequently resold and bought among the public. Apart from the volume of shares released by the company, the public cannot directly buy more shares from the company on the stock exchange. The company decides when it wishes to release another public offering to the public. Until then, the public keeps trading the existing shares of the company in the stock market back and forth.
This is why the stock exchange is known as the secondary market. Let’s now discuss the primary market and how a company makes investments before being listed on the stock exchange. For this, we will dwell on the concept of IPO.
What is Initial Public Offerings (IPOs)?
When a company decides to launch its stock to the public through the stock exchange or exchanges, it has to provide an initial offering of its stock to the public. Generally, this process is what is known as Initial Public Offering. Before the IPO, a company is a private business and can seek investments mainly from certain private investors. These private investors are also known as private shareholders. This is because they invest in the private shares of the company. Both the private company private investors do this transaction in the hopes that the company will become more profitable once publically launched. In the IPO, the private company finally becomes public by releasing new issuance of stock now to the public investors. If the newly public company draws up the attention of the public and has a lot of demand for its stock. Then its stock price will drive up which reaps profit for both the public company as well as the initial private investors.
What is the difference between the Stock market and Stock Exchange?
There is a difference between the stock market and stock exchange, despite both being used interchangeably in a general scenario. The stock market consists of multiple stock exchanges and a lot of other key components that we have mentioned earlier. Stock exchange, on the other hand, is just a part of the stock market. When saying that one is trading in the stock market, this means that they trade in more than one stock exchange. However, when the stock exchange is mentioned for trading, it means a specific stock exchange is being chosen for trading. There are many types of rules and regulations governing the stock exchange. These regulations are intrinsically that of a specific exchange. While there are also laws that govern these stock exchanges, which are enforced by financial regulators or financial regulatory bodies. All parties involved in the stock exchange are to be compliant with these regulations during any transaction.
Everything that is explained up till now is all that you need to know about the basics of the stock market. To summarize it all up, let’s have a rundown on what happens in the stock market.
A rundown of the stock market
Initially, in the stock market, an investor or trader buys the shares of a stock or stocks of companies in a stock exchange. This is done through a broker. A certain volume of shares is traded in that transaction between traders. However, when a company wants to raise revenue, it announces public offerings of its stock at a certain price. Investors buy these as well. The stock exchange, like NASDAQ and regulators like SEC, then makes sure that these offerings and trading are done legally. In the end, an investor owns a portion of the company’s stock through their investment, while companies gain more capital and revenue. This is a simple rundown of the stock market.
Frequently asked Stock Market and trading questions
Now that you know what occurs specifically in a stock exchange, here are some of the questions you may ask related to the Stock market and stock exchange activities.
What is trading?
Investment transactions occurring through buying and selling of stocks is known as trading. Each stock of the company has shares of stocks that they sell to investors are traders.
What are shares of stocks?
Shares are the units created for stocks. When an investor buys these stocks the trade occurs through investment.
What is the volume of stock?
The volume of the stock is the general unit of stock that is being traded in the market at a certain time period. The usual period used for this is the volume of trade in a day, week, 30-day, 50-day period, 90-days period, etc.
What are outstanding shares?
Outstanding shares of a stock are those shares that the company has not yet released in the stock market. In order to raise capital, the company may sell a portion of these outstanding stocks at a certain price in the market.
What is the share price of a stock/Price per share?
The price of each share of a stock is known as the share price of a stock. This determines the current value of the stock in the market.
What is the current market value of a stock?
The company is valued in the market based on the total price of each share it has sold in the market.