A clear starting point for any would-be trader, most
people have a rough idea or preconception of what they think
a stock market is and how it works. Unfortunately, the
answer to this simple question is rather complicated, and
can't readily be summed up in one sentence. Indeed, many
traders may be hard pushed to articulate exactly what a
stock market is and the purpose it serves, even after years
of serious trading. In this article, we're going to attempt
to clear up the ambiguity, and offer a direct and succinct
answer to this most foundational of trading questions
Most people understand that a stock market is a place
where shares are bought and sold, and in essence this is
true. Most people understand a stock market is dominated by
traders who speculate on the price of shares to make a
profit on the difference between the buying and selling
price, and in essence this is true. But a stock is so much
more in-depth than these two basic propositions would
suggest, and requires some deeper analysis to get to the
bottom of what's really going on
A stock market is a primarily a virtual exchange of
securities (that is, shares and debentures, which companies
use as a means of raising finance) and derivatives (i.e.
virtual instruments such as contracts that relate to assets
and securities and can be traded). It is virtual in the
sense that the market is an intangible concept, rather than
a physical place, and as a result of advancing technologies
traders can now get involved with little more than a laptop
or mobile phone. The market brings together a range of
traders of all shapes and sizes - from small, one-man bands
trading for their own personal gains through to hedge funds
managing billions in assets, and everything in between.
Stock markets list the securities of publicly traded
companies, identified in the UK by the appendage 'plc'. As
distinct from a regular limited company ('Ltd.'), plc's
offer their shares to the public at large, who are generally
concerned with trading on the price point of a given share
rather than its yield. Shares can change hands several times
on a daily basis, and at insignificant levels the company is
unconcerned with who owns those shares.
Shares themselves are intangible assets, entitling the
bearer to an annual payment known as a 'dividend', paid out
of distributable profits, and often corresponding voting
rights in proportion to the size of the share held at the
AGM, where major strategic decisions such as electing the
board are put to the vote. The bearer of a share at any
given point is in effect a part owner of the business to
which those shares pertain, and it is this aspect that gives
a share any underlying value
The price of a share at any given stage is dictated by
supply and demand within the market, and rises or falls
every time a share is bought or sold. This effectively means
that shares are priced by the collective will and attitudes
of the market, comprised of all the traders and investment
houses that actively trade in those securities.
The price of a share at any given stage is dictated by
supply and demand within the market, and rises or falls
every time a share is bought or sold. This effectively means
that shares are priced by the collective will and attitudes
of the market, comprised of all the traders and investment
houses that actively trade in those securities.
Stock markets generally trade over a set duration of
hours, usually reflecting the working day in their
particular region, allowing the zealous trader to trade
different markets round the clock - from London to New York
to Tokyo - while affording those companies so listed to
raise capital in the form of initial share issues to the
market. As a result, the markets operate on a slick basis
almost around the clock, bringing together buyers and
sellers of securities and giving businesses and governments
a free, unadulterated bellwether for the economic and
commercial outlook of a given sector, industry or economy.
In essence, that's the foundation of what a stock market
is, and it's by no means a comprehensive study. Getting to
know the markets requires lengthy research and an
understanding of business, economics, law and politics. Yet
for those that do get to grips with how the markets operate,
the allure of trading profits is sufficient rewards for all
their hard work.
