A stock market is where shares in corporations are issued and traded. Stock markets are key components of a free market economy.
Stock markets serve two main functions.
From the company perspective, stock markets provide access to capital, usually in the form of cash. If a company needs to finance a major project, it can sell its shares in the stock market to raise capital, instead of borrowing the money from a bank.
From the shareholder perspective, the stock market provides a way to participate in a company’s growth, and also quickly convert shares into cash. This happens in two main ways.
In a privately held company, stockholders are usually comprised of founders and initial investors who can sell their shares on the stock market exchange and reap the reward for the risk they took in creating and growing their business venture. This is referred to as the primary market.
For investors who own shares in publicly traded companies, the stock market allows them to participate in the growth of a company without taking the risk of starting a company themselves. This is referred to as the secondary market.
The two main stock markets in the United States are the New York Stock Exchange (NYSE) and the NASDAQ. Foreign stock exchanges include London Stock Exchange, Hong Kong Stock Exchange, Euronext and Deutsche Bourse.
In the early days of the stock markets, stocks were traded on the floor of the exchange person-to-person. Now, almost all stock trades are done electronically.
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