What is a Stock Market?

By Jason Fittler

A stock market or equity market is the aggregation of buyers and sellers of stocks (shares). These are securities listed on a stock exchange.

A stock exchange is a place to trade stocks.

Companies may want to get their stock listed on a stock exchange. Other stocks may be traded "over the counter", that is, through a dealer. 

A large company will usually have its stock listed on many exchanges across the world.

Market participants include:

  • Individual retail investors and traders
  • Institutional investors such as mutual funds, banks, insurance companies and hedge funds
  • Publicly traded corporations trading in their own shares

To trade in the stock market means agreeing on a price in which both parties (buyer and seller) agree to the transaction of "shares".

The shares represent an equity or ownership interest in a particular company. Their orders usually end up with a professional at a stock exchange, who executes the order of buying or selling.

The stock market is one of the most important sources for companies to raise money. It allows businesses to be publicly traded to raise extra financial capital for expansion. 

The liquidity of an exchange allows investors the ability to quickly and easily sell securities.

The financial system in most western countries has undergone a remarkable transformation. One feature of this development is disintermediation (or cutting out the middle men).

A portion of the funds involved in saving and financing flows directly to the financial markets. This is instead of being routed via the traditional bank lending and deposit operations.

An important component of this process is the general public interest in investing in the stock market. Either directly or through mutual funds. 

Statistics show in recent decades, shares have made up an increasingly larger proportion of households' financial assets.

Sweden in the 1970s. Deposit accounts and other liquid little risk assets made up almost 60 percent of household financial wealth. Compared to less than 20 percent in the 2000s.

The major part of this adjustment is financial portfolios have gone directly to shares. 

But a good deal now takes the form of various kinds of institutional investment for groups of individuals. For example pension funds, mutual funds, hedge funds, insurance investment of premiums, etc.

When you buy shares in a company you are in fact buying the right to participate in the profits the company makes.

You are also accepting the risk, which the company takes on to earn that income.

These risks will vary between companies. They include economic risk, government risks (change in legislation), debt risk and poor decisions by the board of the company. 

Although you do not receive anything physical when you purchase the shares you are in fact buying into a physical asset.  Which in the case of Woolworths has physical stores, people in them as well as goods to sell.

The complexity of understanding shares and the stock market begins with understanding what the stock market is and what shares are.

The stock market is like any market, it is a place where people come together to buy or sell goods.

In a stock market these goods are generally shares and bonds. 

Shares are simply, a share in the underlying company. The shares give you the rights to participate in and distributions as well as vote on changes and direction of the company.

The share price reflects the wealth of the company.

If it is make increasing profits then the price will also increase.

If the company has a bad year then you can expect to see the price pull back as well.

The next step in investing in shares is to understand how a company reports its results.

We'll talk about that next time.