What is the Stock Market? How Does the Stock Market Work? Who Regulates the Stock Market? Who Works on the Stock Market? The stock market refers to the collection of markets and exchanges where the issuing and trading of equities (stocks of publicly held companies), bonds and other sorts of securities takes place, either through formal exchanges or over-the-counter markets. Also known as the equity market, the stock market is one of the most vital components of a free-market economy, as it provides companies with access to capital in exchange for giving investors a slice of ownership.
How Does the Stock Market Work?
The stock market can be split into two main sections: the primary market and the secondary market. The primary market is where new issues are first sold through initial public offerings (IPOs). Institutional investors typically purchase most of these shares from investment banks, the worth of the company “going public” and the amount of shares being issued determine the opening stock price of the IPO. All subsequent trading goes on in the secondary market, where participants include both institutional and individual investors. (A company uses money raised from its IPO to grow, but once its stock starts trading, it does not receive funds from the buying and selling of its shares).
Stocks of larger companies are usually traded through exchanges, entities that bring together buyers and sellers in an organized manner where stocks are listed and traded (although today, most stock market trades are executed electronically, and even the stocks themselves are almost always held in electronic form, not as physical certificates). Such exchanges exist in major cities all over the world, including London and Tokyo.
In terms of market capitalization, the two biggest stock exchanges in the United States are the New York Stock Exchange (NYSE), founded in 1792 and located on Wall Street (which colloquially is often used as synonym for the NYSE), and the Nasdaq, founded in 1971. The Nasdaq originally featured over-the-counter (OTC) securities, but today it lists all types of stocks. Stocks can be listed on either exchange if they meet the listing criteria, but in general technology firms tend to be listed on the Nasdaq.
The NYSE is still the largest and, arguably, most powerful stock exchange in the world. The Nasdaq has more companies listed, but the NYSE has a market capitalization that is larger than Tokyo, London and the Nasdaq combined.
Who Regulates the Stock Market?
The Securities and Exchange Commission (SEC) is the regulatory body charged with overseeing the U.S. stock markets. A federal agency that is independent of the political party in power, the SEC states its “mission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.”
Who Works on the Stock Market?
There are many different players associated with the stock market, including stockbrokers, traders, stock analysts, portfolio managers and investment bankers. Each has a unique role, but many of the roles are intertwined and depend on each other to make the market run effectively.
Stockbrokers, also known as registered representatives in the U.S., are the licensed professionals who buy and sell securities on behalf of investors. The brokers act as intermediaries between the stock exchanges and the investors by buying and selling stocks on the investors’ behalf.
Stock analysts perform research and rate the securities as buy, sell or hold. This research gets disseminated to clients and interested parties to decide whether to buy or sell the stock. Portfolio managers are professionals who invest portfolios, collections of securities, for clients. These managers get recommendations from analysts and make buy/sell decisions for the portfolio. Mutual fund companies, hedge funds and pension plans use portfolio managers to make decisions and set the investment strategies for the money they hold.
Investment bankers represent companies in various capacities such as private companies that want to go public via an IPO or companies that are involved with pending mergers and acquisitions.
Once upon a time, “stock market” was synonymous with “stock exchange” – a place where people literally gathered to buy and sell securities. In this era of computerized trading and electronic communication networks (ECNs) like those run by Nasdaq and BATS, that’s no longer true. And the human element has been reduced even further by the advent of high-speed or high frequency trading, automated trading platforms which use computer algorithms to transact a large number of orders at extremely high speeds – millions of orders in a matter of seconds, in fact. High-frequency trading became popular when exchanges started to offer incentives for companies to become market makers in stocks, thus providing liquidity to the market.
While physical exchanges of paper are now rare, and actual trading floors may continue to dwindle, the concept of a stock market remains intact. Be it literal or figurative, societies, companies and individuals all like the idea of an open, public forum for raising, investing and making money.