The stock market allows buyers and sellers of securities to meet, interact, and transact. The markets allow for price discovery for shares of corporations and serve as a barometer for the overall economy. Buyers and sellers are assured of a fair price, high degree of liquidity, and transparency as market participants compete in the open market.
The first stock market was the London Stock Exchange which began in a coffeehouse, where traders met to exchange shares, in 1773.
The first stock exchange in the United States began in Philadelphia in 1790.
The Buttonwood Agreement, so named because it was signed under a buttonwood tree, marked the beginning of New York’s Wall Street in 1792. The agreement was signed by 24 traders and was the first American organization of its kind to trade in securities. The traders renamed their venture the New York Stock and Exchange Board in 1817.
A stock market is a regulated and controlled environment. In the United States, the main regulators include the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA).
The earliest stock markets issued and dealt in paper-based physical share certificates. Today, stock markets operate electronically.
Though it is called a stock market, other securities, such as exchange-traded funds (ETFs) are also traded in the stock market.
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How the Stock Market Works
Stock markets provide a secure and regulated environment where market participants can transact in shares and other eligible financial instruments with confidence, with zero to low operational risk. Operating under the defined rules as stated by the regulator, the stock markets act as primary markets and secondary markets.
As a primary market, the stock market allows companies to issue and sell their shares to the public for the first time through the process of an initial public offering (IPO). This activity helps companies raise necessary capital from investors.
A company divides itself into several shares and sells some of those shares to the public at a price per share.
To facilitate this process, a company needs a marketplace where these shares can be sold and this is achieved by the stock market. A listed company may also offer new, additional shares through other offerings at a later stage, such as through rights issues or follow-on offerings. They may even buy back or delist their shares.
Investors will own company shares in the expectation that share value will rise or that they will receive dividend payments or both. The stock exchange acts as a facilitator for this capital-raising process and receives a fee for its services from the company and its financial partners.
Using the stock exchanges, investors can also buy and sell securities they already own in what is called the secondary market.
The stock market or exchange maintains various market-level and sector-specific indicators, like the S&P (Standard & Poor’s) 500 index and the Nasdaq 100 index, which provide a measure to track the movement the overall market.
Following an IPO, the stock exchange serves as a trading platform for buying and selling the outstanding shares. This constitutes the secondary market. The stock exchange earns a fee for every trade that occurs on its platform during secondary market activity.