Stock Market – What It is and How Does Stock Market Work?



In brief, a Stock Market is a marketplace where individual buyers and sellers are engaged in the buying and selling of stocks; stock is a fractional share of a public company which individuals can invest in.

In this guide, we’ll dive more into this definition of a Stock Market and go over some critical topics such as:

  • What is the Stock Market?
  • What is the Purpose of the Stock Market?
  • How Does a Stock Market Work?
  • What is it’s Relation to Stock Exchange?

So, without much ado, let’s get right to it…

What is the Stock Market? | Explained in Plain English

A Stock Market is a place where buyers and sellers gather around- to do buying and selling. No-brainer, I know.

But what gets bought and sold in this market is the thing that differentiates a Stock Market from other market places. A Stock Market is a place where buyers( that’s you) and sellers(public companies like Uber, Facebook, Amazon) engage in buying and selling of Stocks.

What is a Stock?

A stock is a small part of the ownership of a company, which it sells to buyers like you for a small amount of fee. A company sells its stocks to the public to get the instant investment required for expanding their business. The public, in turn, will get any future profits from their investment.

Stock Markets: A Brief History

Although the traces of a proto-Stock Market can be found as early as in the 11th to 12h century, the modern Stock Markets emerged around the time of the East India Company at around the 15 or 16th century.

Antwerp in Belgium is accepted by scholars to have a housed the first professional organization that resembled a Stock Market in its working and structure. These markets were engaged in dealing with government affairs, businesses, and debts. They didn’t deal with stocks, yet.

With the advent of the East India Company and the risks associated with losing ships in long travels, no single investors would invest all their money in a single ship. The company thus started selling its shares to the public, and thus the modern Stock Market came to be.

What is the Purpose of the Stock Market?

A Stock Market serves a very important purpose in the modern economy, and it can be a force of growth when operated under proper regulations.

A key purpose for the existence of the Stock Market is that it enables private companies to get instant access to funding in exchange for their stocks. A corporation looking to expand its business requires a large amount of capital to pay off new employees, office costs, advertisements, etc.

Access to public money enables a company to grow. This also helps the corporations avoid going into debt for investments.

How a Stock Market Works | Explained for Beginners

A Stock Market gives buyers and sellers a platform to negotiate prices of stock to complete a trade.
The buyer’s bid a particular amount for a piece a stock, whereas the sellers put an ‘ask’ for a particular amount of price. The trade occurs when both the buyers and sellers agree on a price on offer.

The price of a stock is set by supply and demand, and most of the price-setting is done by algorithms.

After an investor has bought a stock, they can sell it again amongst other investors to make a profit. For example, suppose an investor sold 1000 stocks or shares for $15 per stock, which he initially bought for $10 per stock. Here, the investor makes a profit of 50% on their initial investment.
At any given time, there are millions of buyers and sellers engaged in the trading of shares in a stock market. All of this made possible through a stock exchange, which is a support structure that enables all the workings of a stock market. A Stock Exchange is an organization that allows companies to index their shares for selling.

Some popular Stock Exchanges are the New York Stock Exchange, Shanghai Stock Exchange, and National Stock Exchange of India.

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Relation Between Stock Market And Stock Exchange

A Stock Market is an entity that encompasses all of the share trading activities of a market. A Stock Exchange, on the contrary, is an organization that provides a structure to engage in this trading.

A Stock Exchange gives the buyers and sellers an actual place where they can engage in buying and selling by setting all the terms and conditions. It also provides services to all other players in a Stock Market like stockbrokers, investment banks, etc. Apart from investors and corporations.

Key Takeaways

Stock Markets are a key asset in a modern economy and can act as a driver of economic growth.

They help growing corporations raise liquid capital in exchange for stocks or equity, i.e. a small part of the company’s assets, by allowing them to sell their shares to public investors.

Through this, they also help investors looking to make a profit by providing them alternate investment opportunities.