What is the Stock Market? (In a Nutshell)

First of all, the term stock market is used incorrectly, since it might be understood that there is just one market. In reality, there are multiple markets as I briefly explained in my article "What are Financial Markets? (In a Nutshell)".

The Stock Market is an exchange of investors who buy and sell securities, such as equity, debt and derivative securities. These exchanges can be either virtual or physical. Some of these include the New York Stock Exchange (NYSE), NASDAQ, London Stock Exchange, Taiwan Stock Exchange and many others.

There was a time it was a place where people literally gathered to buy and sell securities. In this era of computerized trading and electronic communication networks, that's no longer the case. The human element has been reduced even further by the advent of high-speed trading, automated trading platforms which use computer algorithms to transact many orders at extremely high speeds.

The Stock Market is split into two main sections: The Primary Market and the Secondary Market, which will be explained shortly.

Commonly people go and buy stocks, which are equity securities, to make you part owner of a company and enjoy any capital gain (stock price goes up) the stock might have. You buy securities through a broker, which is an individual or firm that charges a fee for buying or selling securities for the investor.

An important role in the growth of the industries, companies, and commerce of the country that will affect the economy is played by the Stock Market. That is the reason that the government and central banks of the country keep a close watch on the happenings of the Stock Market.

Whenever a company wants to raise funds for further expansion or settling a new business venture, they must either take a loan from a financial organization or they have to issue shares through the Stock Market, which is the primary source for any company to raise funds for business expansions. If a company wants to raise some capital for the business, it can issue shares of the company. To issue shares for investors to buy stocks a company needs to get listed to a stock exchange and through the Primary Market (which deals with issuing of new securities through an investment bank) so they can issue the shares and get the funds for business requirements.

In case of an already listed public company, they issue more shares to the market for collecting more funds for business expansion. For the companies which are going public for the first time, they need to start with the Initial Public Offering or the IPO.

This is the primary function of the Stock Market and it plays the most important role of supporting the growth of industries, companies, and commerce. It is because of this that a rising stock market is the sign of a growing economy.

The secondary function of the stock market is that it plays the role of a common platform for the buyers and sellers of these stocks that are listed at the stock market. It is the Secondary Market (market in which investors buy and sell securities they already own) where retail investors and institutional investors buy and sell the stocks. In fact, these stock market traders raise funds for the businesses by investing in the stocks.