What Is a Stock Market?

One of the strongest forces in the world economy today is the trading that takes place on stock markets. A stock market is simply an exchange where shares of stock are sold and bought. A share of stock represents partial ownership in a business.

Companies that offer stock of their businesses are known as public firms. Unlike private firms, these businesses are owned by the general public via shares of stock. A business makes the decision to offer stock as a way to raise capital. The profits created by the initial stock offering of the company would then be reinvested back into the business and used for things like funding expansion of the business’s facilities.

After the initial public offering, the company has the option of having its stock traded in a stock market. There are stock markets in many different countries. Two of the most famous and prominent though are the New York Stock Exchange and the NASDAQ in the United States. To be listed on one of these exchanges, the company will have to meet certain requirements. For example, to be listed on the New York Stock Exchange, a company must have a stock price at the time of listing of at least four dollars and at least 1.1 million shares of stock outstanding.

Usually, a stock market is headquartered in a physical location. For example, the New York Stock Exchange is physically located on Wall Street in Lower Manhattan. However, this physical location is actually more symbolic than anything. A person doesn’t have to actually visit a stock market in person to purchase stock. Instead, he can hire a stock broker who will have a representative down on the trading floor of the physical stock market purchase the stock for him for a commission. However, even more common now, stock trades will simply be transacted on computers over the internet.

People buy shares of stock with the goal of creating a profit. For example, an individual may buy 100 shares of stock in a company at a price of five dollars per share. He or she would hope these shares of stock would rise in value. If they increase in value to seven dollars per share, that investor would have made $200 in profit. However, if the value of the stock fell to three dollars per share, that investor will lose $200 of his or her investment. People try to avoid these losses by selling their stock when signs of unprofitability for the company appear. Alternatively, they buy when a company appears to have a profitable future. Due to the fluctuating nature of the apparent profitability of companies and the value of stock, trading in stock markets can be very frantic.

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