We have to first know 'what is a market' in order to understand 'what is stock market.' The word 'market' brings up a vision of a place where the buyers and sellers assemble to trade the goods in exchange for money. We have the examples of fish market, vegetable market or cloth market and so on.
Market, in short, is a kind of arrangement where the sellers and buyers voluntarily exchange goods or services with money. There are two pre-requisites for the market to function; there have to be the sellers and the buyers. Both these parties try to achieve an optimum deal. The seller wants to sell the product and earn the maximum profit, while the buyer wants to buy it at an optimum price.
The chief function of the market is to discover the right price.
Going by the definition of the market, stock market is also a place where the buyers and the sellers of the companies' stocks assemble to do the trading. But this trading takes place in prescribed premises called stock exchange. Technically speaking, a stock exchange facilitates the exchange of securities among the sellers and the buyers. American Stock Exchange -AMEX-is one such example of a stock exchange where the stock trading takes place.
With the passage of time and the advancement of computer technology, the concept of the traditional stock exchange has undergone a sea change. Now we have virtual stock exchanges. The best example of a virtual or electronic stock exchange is National Association of Securities Dealers Automated Quotation System or NASDAQ.
In earlier days, the stock traders would use what was called an outcry method in the physical stock exchanges. They would yell and gesticulate wildly to make their point.
Now the stock trading is performed on a central computer which can be accessed by every stock trader at his personal computer through a telecommunication network. The central computer takes the orders of the buyers and sellers and matches them. If the quantities and the prices are commensurate with each other, the order is executed. The whole process takes place within a fraction of a second.
The unit of trade in a stock market is called share. A share represents your ownership of a company whose stock you are dealing with.
Suppose someone with technical expertise wants to start a large scale company, but does not have sufficient funds. He advertises his plans to open the company and provides the details of its feasibility and success through a kind of prospectus. He thus invites the public at large to invest in the company by buying its shares. This is called an IPO or the Initial Public Offering. Anyone who buys its shares, obviously, becomes the share holder of the company.
But once you buy the shares you would not like to hold them indefinitely. You would want to sell them away either at profit or at loss depending upon your needs.
The company meanwhile lists its stock with a stock exchange. Once the stock of the company is listed, the shareholders can sell the shares of the company and buy the shares of another company. This kind of trading of shares through the stock exchange is called secondary market, while the sale and purchase of the shares at the time of the IPO is called primary market.
The stock exchange provides a platform that facilitates the trading in shares of the listed companies. It also regulates the conduct of the listed companies through certain rules and regulations.
The shares that are traded on stock exchange are received and delivered electronically and entered into the records of the buyers and the sellers. The whole process takes place through a brokerage firm which is also called a depository company. The whole process of transaction, as mentioned earlier, takes place within a matter of seconds. The sellers sell their shares and get the money and buyer get their shares immediately.
Despite the huge ups and downs associated with the stock market, the brokerage firms honor their commitments to their clients.
Stock market is considered as a barometer of the country's economy. The companies listed on stock exchanges collectively contribute to the country's GDP. When the prices of the shares rise, there is a corresponding increase in the index of the stock market. The rise in stock market index indicates the growth of the country's economy. So if you participate in the stock market, you are partaking in the economic growth of your country.virtual stock exchange