What Is the Stock Market? An Introductory Market Guide
When many people think of the stock market, they envision the Hollywood version of Wall Street. Tickertape strewn across the floor. TVs with prices and symbols continuously rolling across them. People shouting to buy or sell. But that’s a pretty far cry from what it looks like today! So, what is the stock market, really?
Today the stock market is less a physical place and more a digital one. True, shares used to trade back and forth on the floor at the New York Stock Exchange (NYSE). But today the market exists online. You can still trade shares on the NYSE, but you do it from the comfort of your home, on your computer or smartphone – on an app like Cash App, for example.
Most aspects of the stock market today are digital, which makes it more accessible and easy to use for any investor — not just Wall Street brokers!
Here’s a quick introduction to the stock market for beginners, to help you get familiar with the concept and purpose of the stock market.
Not “the” Stock Market but a Collection of Markets
The first thing to know is that the stock market is actually a collection of smaller markets. When you think “stock market,” you’re thinking of the greater collection of markets where you can buy or sell any type of security. But not all securities are part of the same exchange. Here are some of the individual exchanges you might be familiar with:
- New York Stock Exchange (NYSE)
- Nasdaq Stock Market (Nasdaq)
- Over-the-Counter Exchanges (OTC)
- Better Alternative Trading System (BATS)
- Chicago Board Options Exchange (CBOE)
Each of these individual exchanges trades different listed securities. For example, Procter & Gamble (NYSE: PG) trades on the NYSE, whereas Apple (Nasdaq: AAPL) trades on the Nasdaq exchange.
The digital nature of the broader market means investors can buy, sell or hold securities from any of the individual exchanges with relative ease. All you need to do is find an online broker!
A Forum for Companies and Investors
The stock market plays two roles. For companies, markets provide access to capital. For investors, it’s a wealth generation opportunity. In this way, the stock market is the medium for connecting companies to investors—a key component of a free market economy.
Companies sell shares on the stock market to get cash upfront to finance ventures that’ll (hopefully) result in growth. It’s preferable to a bank loan or selling bonds in many situations, and share price reflects the success or failure of that investment. Investors buying shares are rewarded for their upfront investment with returns in the form of a rising stock price.
The Market Values Companies
The stock market is more than a collection of publicly-traded companies. It’s also a scale for valuing these companies. A company’s share price is a public measuring tool for the company’s growth. This allows investors to set their expectations with the same metric.
Company ABC might have a share price of $10. Jim feels good about the company and is willing to buy shares at that price. Dave feels the company is overvalued and wants to sell his shares because he thinks they’ll come down. Dave can sell and Jim will buy, both using the same rubric of $10 per share to make their decision.
The market also provides real-time insights on company value. If Company XYZ is in the news for a major scandal, investors can gauge public sentiment about the stock based on how its share price reacts. Again, the market is the mechanism for benchmarking value.
The Stock Market Explained
The stock market is a very complex system to understand in its entirety. Thankfully, a baseline understanding is really all you need to get started as an investor. This fundamental understanding will help answer other questions, like how do stocks work? From there, most investors learn through exposure and develop an understanding of broader market functions. It takes time!
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About Brian M. Reiser
Brian M. Reiser has a Bachelor of Science degree in Management with a concentration in finance from the School of Management at Binghamton University.
He also holds a B.A. in philosophy from Columbia University and an M.A. in philosophy from the University of South Florida.
His primary interests at Investment U include personal finance, debt, tech stocks and more.