What is the Stock Market?

Key Takeaways

• Stock trading is like an auction.

• A stock market is a place for sellers and buyers to trade in stocks.

• An effective stock market could be vital to economic development.

Understanding the stock market

A stock market is a marketplace for financial activities such as issuing, buying and selling equities of companies. Shares of listed companies are allowed to be traded publicly on exchanges, such as New York Stock Exchange and the Nasdaq. A network of exchanges worldwide constitutes the global stock markets.

Generally speaking, stocks are the main trading category in the stock market. However, equity-related instruments, such as ETFs and derivatives, are also traded in the stock markets.

All transactions are made under agreed-upon rules stated by the exchanges and regulators to provide a rather fair trading mechanism for market participants.

Like an auction

In everyday conversations, the stock market is referred to as a place where sellers and buyers negotiate prices and trade shares.

To put it simply, the process of stock trading is just like an auction. The price of a matchmaking trading between the seller (asking price) and the buyer (bidding price) is usually facilitated by stockbrokers. When you bid for a stock, it means you see the upward potential for its future prices. The final actual execution price is affected by many factors, including but not limited to market sentiment, demand and liquidity.

Purposes

A stock market is vital to economic development. Building a healthy and effective stock market will greatly improve the efficiency of capital utilization.

A stock market realizes the goal from two aspects.

First, it provides a place for companies to issue their stocks to raise capital, which will be used to sustain or expand their businesses.

Second, the stock market provides an opportunity for individual investors to share in the investment income of listed companies.