What is the Stock Market and How Does it Work?

Last updated on July 22nd, 2017

Companies create and issue financial securities in the primary market, and investors trade these securities on the secondary market. For this reason, the secondary market is sometimes called the “securities market.”

The secondary market includes stock markets, bond markets, and options markets, although stock markets receive the most publicity and attention.

What is a Stock Market?

A stock market is a place where willing buyers and sellers exchange stocks. Most publicly traded companies have their stock listed on a stock market exchange, such as the New York Stock Exchange (NYSE) or the National Association of Securities Dealers Automated Quotations (NASDAQ). Similar exchanges exist in most major economies throughout the world, many of which are linked together electronically.

Each stock listed on a stock exchange is represented by a stock ticker, which is a unique identifier assigned to each security traded on a particular market. For example, AAPL represents Apple and HD represents The Home Depot. A stock symbol can consist of letters, numbers, or a combination of both.

The picture Wall Street likes to paint of an “opening bell” followed by frantic trading in a huge room is mostly fiction in the 21st century. Today, most stock trading is done electronically through an online broker. You can buy or sell securities from the comfort of your home, and the entire online transaction is efficient and straightforward.

How Does the Stock Market Work?

The price of each security traded in these markets is determined by supply and demand, just as prices are established in any free market.

Millions of investors from across the world participate in financial markets, and the collective effort determines how stocks (and other financial securities) are priced.

For example, if the number of Apple shares that investors want to buy is greater than the number that investors want to sell, the price of Apple stock will rise. As new information about the company becomes available, changes in supply (investors who want to sell) and demand (investors who want to buy) may result in a new market price.

This process takes place through the bid-ask spread. The bid is the highest price that an investor in the market is willing to pay at a given time, while the ask is the lowest price at which someone is willing to sell. When the price of a bid and offer coincide, a trade takes place (learn more about market trades).

Financial markets streamline the process of bringing together willing buyers and sellers, allowing investors to trade quickly without incurring exorbitant transactions costs. Financial markets also establish market prices in response to new company information. For example, a firm that launches a new product will receive valuable information about how that product will be received in the market by observing how the stock market reacts to the new launch. If investors love the new offering, demand for the stock will increase along with the stock price.

I hope this article helps you better understand financial markets and the stock market. If you have a question, please leave a comment below.