by Amanda Harvey
What is a stock market? Quite simply, it is the sum total of the buyers and sellers of stocks (equity in a company), also known as shares. These stocks include publicly traded shares which are offered through a stock exchange, as well as those which are privately traded. This buying and selling activity constitutes a stock market, and this may be further defined by the area in which the trading takes place. The broadest classification of a stock market is the global stock market which encompasses all the trading conducted on a world-wide basis. A stock market can also be distinguished by country or region, such as the U.S. stock market, or the Asian stock market.
What Is a Stock Market Compared to a Stock Exchange?
A stock market is not a particular physical or even virtual location. It is a description of the entirety of the trading activity conducted in the arena of buying and selling stocks.
A stock exchange on the other hand, is an arena in which shares in companies are listed and the subsequent trading of these shares takes place. This is not necessarily a physical location, and trading is often conducted via an electronic platform, however a stock exchange is an actual entity, and as such is regulated by the relevant government authorities, such as the SEC in the United States.
The stock exchanges in any country make up an important part of the country’s stock market, but there are various other components which comprise the total market. A proportion of trading is conducted ‘over-the-counter,’ or ‘off exchange,’ and there are various alternative trading venues such as electronic trading networks, and 'dark pools'.
What Is a Stock Market Impact on Economy?
Dramatic movement on the stock market can have a profound effect on global or national economy. A very well noted instance is the stock market crash of 1929 which was certainly a factor in the lead-up to the Great Depression of the 1930s. When stock prices plummet, investors are affected in terms of capital, confidence, and spending power, which sends ripples out into the broader economy. The stock market also influences monetary policy in ways such as interest rates being lowered to compensate for a downturn in the market.
The stock market is vitally important to businesses as it is a primary source of raising capital. As investors contribute to the expansion of these businesses, the development of the businesses adds to the overall growth of the economy. When things are going well, this creates a positive upward cycle. The reverse also applies, however, that when investors are pulling money out of stocks, this contributes to a downward spiral.
As well as the stock market influencing the economy, clearly the reverse also holds true. Movement in the stock market is greatly affected by economic news and policy, and political events that affect the economy.
In our financial times, the stock market is inextricably linked with the economy, both on a national and global level.
What Is a Stock Market in its Benefit to the Investor?
Clearly, investment in the stock market is important to the economy, but it also offers many advantages to the investor. The greatest benefit is clearly the opportunity to make a much higher return on investment than is offered by keeping money in the bank. Due to the volume of trading, an investor can also realize these profits quickly, rather than having their capital tied up for long periods of time. The fact that there are plenty of buyers and sellers facilitates fast and easy transactions, and the investor can then re-invest their money to begin achieving their next amount of increase.
Other benefits of investing in the stock market include the ease of conducting this trading from any location via the Internet, vast amounts of easily accessible information which help the investor to make informed decisions, and a plethora of brokers offering good service and low commission rates.
Conclusion to ‘What Is a Stock Market?’
In answer to the question, ‘what is a stock market?’ it is the big picture of all the stocks that are bought and sold in companies, and all the movement of capital that occurs with this trading activity. A stock market, whether on a global or local scale, is an integral part of the fabric of the economy as we know it, and without this important part of our financial landscape, it is likely that many of the things we take for granted would be unable to function in the dynamic way that they do.