Learning about the components of the stock market helps investors understand the market’s many uses. One of the most important uses of the stock market is to provide large companies with a way to raise capital in exchange for a portion of company ownership. The aggregate effect is that millions of investors help finance economic development as businesses expand and stock appreciates in value. Arguably, understanding how each component works in this process is important.
Stock markets around the world are commonly organized into stock exchanges. Exchanges are generally classified as national, regional, and over-the-counter markets. For example, the largest stock exchange in the United States is the New York Stock Exchange, which has the highest trading volume in the world. Regional exchanges include the Chicago Stock Exchange and the Philadelphia Stock Exchange. Over-the-counter markets include stocks not formally listed in any exchange.
Stocks represent a share of ownership in the issuing company. By selling pieces of ownership in the stock market, a company raises capital to invest back into the company. To raise money this way, the issuing company must be listed in a stock exchange. To get listed on an exchange, companies must meet specific criteria called listing requirements that are established by each stock exchange. For example, the New York Stock Exchange indicates, among other requirements, that companies must have earned between $10 and $12 million in the last three years and have at least 1.1 million public shares to qualify for listing on the exchange. As a result of the listing requirements, the stock market is a collection of stocks issued by some of the leading companies in the country.
Another important component of the stock market is the professionals who work there. Stock brokers are the individuals who actually do the buying and selling in the stock market. However, these transactions are on behalf of investors and not necessarily for the personal benefit of the broker. Brokers are commonly categorized into four groups: commission brokers, independent brokers, competitive traders, and specialists. Commission brokers work for brokerage firms or individual investors who buy and sell stocks. Like the name indicates, independent brokers work for themselves and may free lance for other brokers or brokerage firms that need extra help. Competitive traders look for disparities in stock prices to make money for themselves or clients. Lastly, specialists ensure that the buying and selling process occurs fairly and efficiently.
Investors make up an important component of the stock exchange because investor capital is what makes the market work. Investors include large financial intuitions, insurance companies, the federal government, retirement funds, and individuals. Investors put their money in the stock market to buy ownership in companies, take advantage of emerging trends or invest in new products. If the stock price appreciates, the investor makes money. However, if the stock loses value, the investor can lose a part or all of his investment.
- "Principles of Finance;" Scott Besley; 1999
- "Financial Markets and Institutions;" Jeff Madura; 2009
- stocks and shares image by Andrew Brown from Fotolia.com