Finance > Investing in the Stock Market
Understanding the Stock Market
With the rise in online platforms making it easy for investors to make trades, the basic understanding of the stock market can easily be overlooked. This article is your introduction to the stock market, the stock exchange and shares.
In This Article
Key Terms:
Stock Market: A term used to refer to the overall buying and selling of stocks
Stock Exchange: This is the infrastructure that facilitates the buying and selling of stocks
Share: A unit of ownership within an organisation
Public Company: A company that, at some stage, sold either all or part of itself to the public
Initial Public Offering (IPO): The first time a company sells some of its shares to the public
Primary Market: The market that issues new shares, e.g. through an IPO
Secondary Market: Trading that occurs following the offering on the primary market
Capital: Money or assets that belong to a person or organisation
What Is a Share?
A share represents a unit of ownership within a company. If you own a share in a company, you own a small part of that business. Shares of public companies, i.e. those available for the public to purchase, will be listed on the stock exchange via an IPO and subsequently traded on the secondary market.
Stock Market vs Stock Exchange
The term ‘stock market’ is used to describe the overall trading of stocks across multiple platforms and exchanges. The stock exchange is what facilitates and organises those trades. It is a formal meeting point for companies and investors. In the UK, we have the London Stock Exchange (LSE) however, there are many other exchanges worldwide, including New York Stock Exchange, NASDAQ, Tokyo Stock Exchange etc.
The Purpose of the Stock Exchange
The stock exchange has two main purposes. Firstly, it offers a platform whereby organisations can be listed and sold to the public in order to raise capital. To do so, companies must meet certain requirements before conducting an initial public offering (IPO).
Secondly, it provides a safe and secure environment where investors can confidently make transactions with minimal operational risk. The stock exchange facilitates trades by bringing together buyers and sellers, often without knowing each other’s identities.
How Is Share Price Determined?
For an IPO, the stock price will likely be determined by an investment bank who are hired to analyse the value of the company. Following the IPO, the share price is determined by supply and demand.
Demand for a share in a company will largely depend on how positive the future looks. If the future looks bright, demand might increase, and the opposite is also true. Other factors that may influence demand include changes to management, a rise in competition, impacts of the global economy etc.
It’s important to note that there must be a seller for every buyer. Although the rise in online platforms makes this seem like this isn’t the case, for you to buy a stock at a specific price, someone must also be willing to sell for that same price.
Why Is the Stock Market Important?
While the stock market may only seem to generate the company capital and potentially increase the wealth of investors, this has a huge knock-on effect on the whole economy. Below are a few simple examples.
- Increase employment
The stock market is a place where companies can sell shares to raise capital. This capital is used to expand the business and therefore create jobs.
- Spending
It enables individuals like you and me to benefit from the profits of organisations we choose to invest in. This wealth is likely to be spent in different parts of the economy or re-invested back into the market.
- Circulation of money
Markets help ensure that money is distributed to where it is most needed. Without the stock market, companies would need to borrow money from the bank and pay it back with added interest.
Share This Article
Related Articles
What Are Index Funds?
“Don’t look for the needle in the haystack. Just buy the haystack!” – John C. Bogle.
Index Funds vs Managed Funds
This article gives initial insights into both types of funds and some factors to consider when choosing between the two.
3 Steps to Start Investing
Getting started with investing is often the hardest part. This article breaks it down into three simple steps.