The stock market refers to public markets that are used for issuing, buying, and selling stocks that trade on a stock exchange or over the counter.
The stock market is one of the most vital components of a free-market economy. It provides companies with access to capital in exchange for giving investors a piece of ownership.
Stocks represent ownership claims on a business. These include securities listed on a public stock exchange and those only traded privately.
Before we go further, the world of finance is full of terms that a beginner wouldn’t understand at first. If you’re a beginner in stock investing, check out our article to learn more about basic investing terms.
Usually, the goal in the stock market is to buy a stock, hold it for some time, then sell the stock for more than you paid for it. Sometimes, investors would hold a stock for more than 10 years. While stocks are long term investments, there are still no guarantees.
History of the Stock Market
The first stock markets emerged as early as the 1500s. But tracing back its root, there were several early examples of markets which were very similar to the stock markets.
Way back in the 13th century, merchants in Venice were credited with trading government securities. Soon, bankers in the nearby Italian cities of Pisa, Verona, Genoa, and Florence also began trading government securities.
Fast forward through the 1600s, British, French, and Dutch governments provided charters to companies, including the East India Company. All goods brought back from the east were transported by water. But deadly storms and pirates put the trips at risk.
To lessen the risk, owners sought out investors to proffer financing collateral for a trip. In return, investors received a portion of monetary returns, considering if the ship made it back safely. This is the earliest example of limited liability companies (LLCs).
In 1602, the Dutch East India Company officially became the world’s first publically traded company on the Amsterdam Stock Exchange.
Modern Stock Trading
The New York Stock Exchange (NYSE) was established in 1792. It became the dominant stock exchange in the United States and eventually in the world. The NYSE’s physical position was located among some of the country’s largest banks and companies.
While the London Stock Exchange (LSE) dominated the European stock market, the NYSE became home to a continually expanding number of large companies. Other major countries, such as France and Germany, eventually established their own stock exchanges. However, these were viewed as stepping stones for companies on their way to listing with the NYSE or LSE.
The NYSE is still the largest and most powerful stock exchange in the world. It has a market capitalization that is larger than Tokyo, London, and the Nasdaq combined.
Trading in the Stock Market
Stock exchanges, such as the NYSE, provide the marketplace to facilitate buying and selling of stocks among investors. Government agencies, such as the Securities and Exchange Commission, regulate stock exchanges. They oversee the market to avoid financial fraud and to keep the exchange market running smoothly.
Some stocks are traded over the counter (OTC), where buyers and sellers of stocks commonly traded through a dealer. OTC stocks are stocks that don’t meet the minimum price or other requirements for being listed on exchanges.
Investment banks handle the initial public offering (IPO) of stocks when a company decides to become a publicly-traded company. To learn more about this, you can check out our introduction to IPOs.
Brokers, who may act as financial advisors, buy and sell stocks for their clients, who may be either institutional investors or individual retail investors. If you’re into online trading, check out what you need to know about online brokers.
Equity research analysts do a research on publicly-traded companies to do a forecast whether a company’s stock will rise or fall in price. In addition, stock brokerage firms, mutual fund companies, hedge funds, or investment banks employ these individuals.
Fund managers or portfolio managers buy and sell large quantities of stocks, making them important stock market participants. If, for example, a mutual fund invests heavily in a particular stock, that demand for the stock alone is enough to boost the stock’s price significantly higher.
Stock market indexes measure the overall performance of the stock markets. There are various indexes, each made up of a different pool of stocks. Indexes are also traded in the form of options and futures contracts which are also traded on regulated exchanges.
In the US, examples of indexes are the Dow Jones Industrial Average, NASDAQ Composite Index, Russell 2000, and Standard & Poor’s 500.
Bull and Bear
It’s very often that these two terms are always heard in the stock market. Bull market refers to a stock market in which the price of stocks is rising. A bear market refers to stock prices that are overall declining.
You can check out the origins of bull and bear market to learn more.
Are Stock Markets Always Open?
Having stock markets around the world means there is always a market open in some part of the world. Most of the world’s stock markets open between 9:00 am and 10:00 am and close between 4:00 pm and 5:00 pm.
A number of stock markets also take a break for lunch that lasts for 1 hour to 1.5 hours. Those markets include the Tokyo Stock Exchange, Hong Kong Stock Exchange, Shanghai Stock Exchange, and Shenzhen Stock Exchange.
Ready to invest in the stock market? It’s never too late to join the community of investors. The stock market is huge and it isn’t going away anytime soon. It drives the economic force in virtually every country in the world.
We’ll never know what the future holds for stock markets. But what we know is that they will continue to play an important role in global economies.
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