Nature of Stock Markets
The term “stock market” refers to any institution that supports the purchase and sale of stocks via a stock exchange. There are more than a dozen public stock markets in the U.S., with the two most well-known being Nasdaq and the New York Stock Exchange. Despite the differences in these markets, there are a group of core characteristics they have in common.
The stock market is an organized body where brokers trade the stock of public companies, who introduce their stock through initial public offerings. Stock prices on the market reflect demand and supply, and traders try to predict stock behavior.
An Organized Body
A stock exchange is an organized body with a management committee and rules that control how the exchange works. Traders on the exchange are subject to the rules of the exchange, which are enforced by the management committee. At one time, a stock market was a physical place where traders met face-to-face to make deals, but today most trades take place electronically.
Public Company Stock
Public companies are a key component of stock markets. Public companies are those that have stock that is bought and sold on a public stock exchange. Before a stock can be sold, it must first be listed on the exchange. To protect its investors, a public company is required to disclose financial and business information that could affect stock value.
Trading Through Brokers
Trading on a stock exchange is restricted to stock brokers and traders who are members of the exchange. Individual investors must have a brokerage account in order to participate in trading. For many people, brokerage services are provided as part of an employer-sponsored retirement investment fund. For individuals who want to trade independently, an individual account is required.
Going Public with IPOs
Initial public offerings (IPOs) are the mechanism used to introduce a company’s stock for public sale on a stock exchange. An IPO is said to take place in the primary market, with follow-on trading between investors occurring in the secondary market. An IPO allows a company to raise capital for future growth by selling shares to the public.
Supply and Demand Affect Prices
The price of a company’s stock reflects supply and demand for the stock itself and is often independent of the company’s success. A company’s stock may be considered desirable for a variety of reasons, from the strength of an industry sector to the popularity of a brand.
Stock Market Prediction
In order to make a profit, stock market traders must predict whether a stock’s value will rise. Share prices often reflect the overall economy and can be volatile as investors react to financial news and current events, but traders who are successful predictors can realize significant gains.