Stock Market Strategies for Beginners
What Is the Stock Market?
The term stock market refers to several exchanges in which shares of publicly held companies are purchased and sold. Such financial activities are conducted through formal exchanges and via over-the-counter (OTC) marketplaces that operate under a defined set of regulations.
Both “stock market” and “stock exchange” are often used interchangeably. Traders in the stock market purchase or sell shares on one or more of the stock exchanges that are part of the overall stock market.
The leading U.S. stock exchanges include the New York Stock Exchange (NYSE) and the Nasdaq.
Understanding the Stock Market
The stock market allows purchasers and vendors of securities to connect, interact, and transact. The markets enable for price discovery for shares of corporations and serve as a barometer for the overall economy. Buyers and vendors are assured of a fair price, high degree of liquidity, and transparency as market participants compete in the open market.
The first stock market was the London Stock Exchange which originated in a coffeehouse, where merchants met to exchange shares, in 1773.3 The first stock exchange in the United States launched in Philadelphia in 1790.4 The Buttonwood Agreement, so named because it was signed under a buttonwood tree, marked the commencement of New York’s Wall Street in 1792. The accord was signed by 24 merchants and was the first American organization of its kind to trade in securities. The merchants renamed their venture the New York Stock and Exchange Board in 1817.5
U.S. Securities and Exchange Commission, Historical Society. "The Institution of Experience: Self-Regulatory Organizations in the Securities Industry, 1792–2010."
A stock market is a regulated and controlled environment. In the United States, the primary regulators include the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA).21
The earliest stock markets issued and dealt in paper-based physical share certificates. Today, stock markets operate electronically.
How the Stock Market Works
Stock markets provide a secure and regulated environment where market participants can transact in shares and other eligible financial instruments with confidence, with zero to minimal operational risk. Operating under the defined rules as stated by the regulator, the stock markets function as primary markets and secondary markets.6
As a primary market, the stock market enables companies to issue and sell their shares to the public for the first time through the procedure of an initial public offering (IPO). This activity helps companies raise necessary capital from investors.
A company divides itself into several shares and sells some of those shares to the public at a price per share.6 To facilitate this process, a company requires a marketplace where these shares can be sold and this is achieved by the stock market. A listed company may also offer new, additional shares through other offerings at a later stage, such as through rights issues or follow-on offerings. They may even buy back or delist their shares.
Investors will own company shares in the expectation that share value will rise or that they will receive dividend payments or both. The stock exchange functions as a facilitator for this capital-raising process and receives a commission for its services from the company and its financial partners.6Using the stock exchanges, investors can also purchase and sell securities they already own in what is called the secondary market.
The stock market or exchange maintains various market-level and sector-specific indicators, like the S&P (Standard & Poor’s) 500 index and the Nasdaq 100 index, which provide a measure to monitor the movement of the overall market.
What Are the Functions of a Stock Market?
The stock market ensures price transparency, liquidity, price discovery, and equitable dealings in trading activities.
The stock market guarantees all interested market participants have access to data for all buy and sell orders, thereby assisting in the fair and transparent pricing of securities. The market also guarantees efficient linking of relevant purchase and sell orders.
Modern Markets Initiative. "Fair and Efficient Markets."
Stock markets need to support price discovery where the price of any stock is determined collectively by all of its customers and vendors. Those qualified and willing to trade should get immediate access to place orders and the market ensures that the orders are executed at a fair price.
Traders on the stock market include market creators, investors, traders, speculators, and hedgers. An investor may purchase equities and retain them for the long term, while a trader may enter and exit a position within seconds. A market maker provides necessary liquidity in the market, while a hedger may trade in derivatives.
How Stock Markets Are Regulated
Most nations have a stock market, and each is regulated by a local financial regulator or monetary authority, or institute. The SEC is the regulatory authority tasked with supervising the U.S. equity market.
The SEC is a federal agency that operates independently of the government and without political pressure. The mission of the SEC is stated as “protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation.”
Companies listed on the stock market exchanges are regulated, and their dealings are monitored by the SEC. In addition, the exchanges set certain requirements such as mandating timely submission of quarterly financial reports and immediate reporting of relevant corporate developments, to ensure that all market participants are equally informed.
Failure to adhere to the regulations can lead to suspension of trading and other disciplinary measures.
What Is the Significance of the Stock Market?
The stock market is a component of a free-market economy. It allows companies to raise money by offering stock shares and corporate bonds and allows investors to participate in the financial achievements of the companies, make profits through capital gains, and earn income through dividends. The stock market functions as a platform through which savings and investments of individuals are efficiently channeled into productive investment opportunities and contribute to the capital formation and economic development of the country.
What Is an Alternate Trading System?
Alternative trading systems are locations for matching large purchase and sell transactions and are not regulated like exchanges. Dark pools and many cryptocurrency exchanges are private exchanges or forums for securities and currency trading and operate within private organizations.
Who Helps an Investor Trade on the Stock Market?
Stockbrokers act as intermediaries between the stock exchanges and the investors by purchasing and selling equities and portfolio managers are professionals who invest portfolios, or collections of securities, for clients. Investment bankers represent companies in various capacities, such as private companies that want to go public via an IPO or companies that are involved in imminent mergers and acquisitions.