What is Stock Market?

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A stock or share (also known as a company's "equity") is a financial instrument that represents ownership in a company or corporation and represents a proportionate claim on its assets (what it owns) and earnings (what it generates in profits).

The stock market is where investors connect to buy and sell investments — most commonly, stocks, which are shares of ownership in a public company.The stock market refers to the collection of markets and exchanges where regular activities of buying, selling, and issuance of shares of publicly-held companies take place. Such financial activities are conducted through institutionalized formal exchanges or over-the-counter (OTC) marketplaces which operate under a defined set of regulations. There can be multiple stock trading venues in a country or a region which allow transactions in stocks and other forms of securities.A stock market is a similar designated market for trading various kinds of securities in a controlled, secure and managed environment. Since the stock market brings together hundreds of thousands of market participants who wish to buy and sell shares, it ensures fair pricing practices and transparency in transactions.

How the Stock Market Works

As a primary market, the stock market allows companies to issue and sell their shares to the common public for the first time through the process of initial public offerings (IPO). This activity helps companies raise necessary capital from investors. It essentially means that a company divides itself into a number of shares (say, 20 million shares) and sells a part of those shares (say, 5 million shares) to common public at a price (say, $10 per share).

The stock exchange shoulders the responsibility of ensuring price transparency, liquidity, price discovery and fair dealings in such trading activities. As almost all major stock markets across the globe now operate electronically, the exchange maintains trading systems that efficiently manage the buy and sell orders from various market participants. They perform the price matching function to facilitate trade execution at a price fair to both buyers and sellers.

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Advantages of Stock Market

Until recently, the ultimate goal for an entrepreneur was to get his or her company listed on a reputed stock exchange such as the New York Stock Exchange (NYSE) or Nasdaq, because of the obvious benefits, which include:

  • An exchange listing means ready liquidity for shares held by the company's shareholders.
  • It enables the company to raise additional funds by issuing more shares.
  • Having publicly traded shares makes it easier to set up stock options plans that are necessary to attract talented employees.
  • Listed companies have greater visibility in the marketplace; analyst coverage and demand from institutional investors can drive up the share price.
  • Listed shares can be used as currency by the company to make acquisitions in which part or all of the consideration is paid in stock.

These benefits mean that most large companies are public rather than private; very large private companies such as food and agriculture giant Cargill, industrial conglomerate Koch Industries, and DIY furniture retailer Ikea are among the world's most valuable private companies, and they are the exception rather than the norm.

The NYSE and Nasdaq are the two largest exchanges in the world, based on the total market capitalization of all the companies listed on the exchange. The number of U.S. stock exchanges registered with the Securities and Exchange Commission has reached nearly two dozen, though most of these are owned by either CBOE, Nasdaq or NYSE.23 The table below displays the 20 biggest exchanges globally, ranked by total market capitalization of their listed companies.

Functions of a Stock Market

A stock market primarily serves the following functions:

Efficient Price Discovery
Fair Dealing in Securities Transactions
Liquidity Maintenance
Security and Validity of Transactions
Support All Eligible Types of Participants
Investor Protection
Balanced Regulation

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