Stock Market

AAA

DEFINITION of 'Stock Market'

The market in which shares of publicly held companies are issued and traded either through exchanges or over-the-counter markets. Also known as the equity market, the stock market is one of the most vital components of a free-market economy, as it provides companies with access to capital in exchange for giving investors a slice of ownership in the company. The stock market makes it possible to grow small initial sums of money into large ones, and to become wealthy without taking the risk of starting a business or making the sacrifices that often accompany a high-paying career.

INVESTOPEDIA EXPLAINS 'Stock Market'

The stock market lets investors participate in the financial achievements of the companies whose shares they hold. When companies are profitable, stock market investors make money through the dividends the companies pay out and by selling appreciated stocks at a profit called a capital gain. The downside is that investors can lose money if the companies whose stocks they hold lose money, the stocks' prices goes down and the investor sells the stocks at a loss.

The stock market can be split into two main sections: the primary market and the secondary market. The primary market is where new issues are first sold through initial public offerings. Institutional investors typically purchase most of these shares from investment banks. All subsequent trading goes on in the secondary market where participants include both institutional and individual investors.

Stocks are traded through exchanges. The two biggest stock exchanges in the United States are the New York Stock Exchange, founded in 1792, and the Nasdaq, founded in 1971. Today, most stock market trades are executed electronically, and even the stocks themselves are almost always held in electronic form, not as physical certificates.

If you want to know how the stock market is performing, you can consult an index of stocks for the whole market or for a segment of the market. Examples include the Dow Jones Industrial Average, Nasdaq index, Russell 2000, Standard and Poor’s 500, and Morgan Stanley Europe, Australasia and Far East index.

VIDEO

Loading the player...
RELATED TERMS
  1. Shareholder

    Any person, company or other institution that owns at least one ...
  2. Over-The-Counter Market

    A decentralized market, without a central physical location, ...
  3. Interlisted Stock

    A security that is listed on multiple stock exchanges. An interlisted ...
  4. Exchange

    A marketplace in which securities, commodities, derivatives and ...
  5. Blue Chip

    A nationally recognized, well-established and financially sound ...
  6. Equity

    1. A stock or any other security representing an ownership interest. ...
RELATED FAQS
  1. What's the difference between a capital market and the stock market?

    Capital market is a broader term that includes the stock market and other venues for trading financial products. The stock ... Read Full Answer >>
Related Articles
  1. Investing Basics

    What is the Stock Market?

    A stock market is where shares in corporations are issued and traded. Stock markets are key components of a free market economy.
  2. Investing Basics

    Stock Basics Tutorial

    If you're new to the stock market and want the basics, this is the tutorial for you!
  3. Investing Basics

    The Five Biggest Stock Market Myths

    Stocks that go down must come up, right? Wrong. We bust this myth and four other common market misconceptions.
  4. Investing Basics

    How Interest Rates Affect The Stock Market

    Whether you're buying lunch, a home or a stock, you're influenced by interest rates.
  5. Investing Basics

    The Roles Of Traders And Investors In The Marketplace

    Discover how these two groups work together to keep the market functioning properly.
  6. Personal Finance

    How Stock Market Indexes Changed Investing

    Find out how the first market averages were calculated and what they mean for investors today.
  7. Investing Basics

    Why You Should Understand The Stock Market

    Even if you don't invest a cent in stocks, you should still understand how the stock market works. Find out why.
  8. Mutual Funds & ETFs

    Playing It Safe In Foreign Stock Markets

    Find out some of the lower-risk ways to invest in foreign markets.
  9. Trading Systems & Software

    The Global Electronic Stock Market

    The way trading is conducted is changing rapidly as exchanges turn toward automation.
  10. Budgeting

    The Greatest Market Crashes

    From a tulip craze to a dotcom bubble, read the cautionary tales of the stock market's greatest disasters.

You May Also Like

Hot Definitions
  1. Asset Class

    A group of securities that exhibit similar characteristics, behave similarly in the marketplace, and are subject to the same ...
  2. Fiat Money

    Currency that a government has declared to be legal tender, but is not backed by a physical commodity. The value of fiat ...
  3. Interest Rate Risk

    The risk that an investment's value will change due to a change in the absolute level of interest rates, in the spread between ...
  4. Income Effect

    In the context of economic theory, the income effect is the change in an individual's or economy's income and how that change ...
  5. Price-To-Sales Ratio - PSR

    A valuation ratio that compares a company’s stock price to its revenues. The price-to-sales ratio is an indicator of the ...
  6. Hurdle Rate

    The minimum rate of return on a project or investment required by a manager or investor. In order to compensate for risk, ...
Trading Center