What's a Stock Market?

Introduction to Stocks

Stocks change hands everyday on traditional and electronic markets. A stock market is a private or public market for the trading of company stock and derivatives of company stock at an agreed price; both of these are securities listed on a stock exchange as well as those only traded privately.

The expression 'stock market' refers to the market that enables the trading of company stocks (collective shares), other securities, and derivatives. Bonds are still traditionally traded in an informal, over-the-counter market known as the bond market. Commodities are traded in commodities markets, and derivatives are traded in a variety of markets (but, like bonds, mostly 'over-the-counter').

The stocks are listed and traded on stock exchanges which are entities (a corporation or mutual organization) specialized in the business of bringing buyers and sellers of stocks and securities together.

The stock market in the United States includes the trading of all securities listed on the NYSE, the NASDAQ, the Amex, as well as on the many regional exchanges, e.g. OTCBB and Pink Sheets.

European examples of stock exchanges include the Paris Bourse (now part of Euronext), the London Stock Exchange and the Deutsche Borse.

Function and purpose - The stock market is one of the most important sources for companies to raise money. This allows businesses to go public, or raise additional capital for expansion. The liquidity that an exchange provides affords investors the ability to quickly and easily sell securities. This is an attractive feature of investing in stocks, compared to other less liquid investments such as real estate.

Exchanges also act as the clearinghouse for each transaction, meaning that they collect and deliver the shares, and guarantee payment to the seller of a security. This eliminates the risk to an individual buyer or seller that the counterparty could default on the transaction.

Relation of stock market to modern financial system - The financial system in most western countries has undergone a remarkable transformation. One feature of this development is disintermediation. A portion of the funds involved in saving and financing flows directly to the financial markets instead of being routed via banks' traditional lending and deposit operations.

The New York Stock Exchange (NYSE), nicknamed the "Big Board," is a New York City-based stock exchange. It is the largest stock exchange in the world by dollar volume and, with 2,764 listed securities. As of December 31, 2006, the combined capitalization of all New York Stock Exchange listed companies was $25.0 trillion.

The NYSE is operated by NYSE Euronext, which was formed by the NYSE's merger with the fully electronic stock exchange Archipelago Holdings and Euronext. The New York Stock Exchange trading floor is located at 11 Wall Street, and is composed of four rooms used for the facilitation of trading. The main building, located at 18 Broad Street between the corners of Wall Street and Exchange Place, was designated a National Historic Landmark in 1978.

NYSE Group merged with Euronext, and many of its operations (particularly IT and the trading platform) will be combined with that of the New York Stock Exchange and NYSE Arca.

The NASDAQ (acronym of National Association of Securities Dealers Automated Quotation System) is an American stock exchange. It is the largest electronic screen-based equity securities trading market in the United States. With approximately 3,200 companies, it lists more companies and on average trades more shares per day than any other U.S. market.

It was founded in 1971 by the National Association of Securities Dealers (NASD), who divested themselves of it in a series of sales in 2000 and 2001. It is owned and operated by the NASDAQ OMX Group, the stock of which was listed on its own stock exchange in 2002, and is monitored by the Securities and Exchange Commission (SEC).

With the completed purchase of the Nordic-based operated exchange OMX, following its agreement with Borse Dubai, NASDAQ is poised to capture 67% of the controlling stake in the aforementioned exchange, thereby inching ever closer to taking over the company and creating a trans-atlantic powerhouse.

The Bombay Stock Exchange Limited is the oldest stock exchange in Asia. It is also the biggest stock exchange in the world in terms of listed companies with 4,800 listed companies as of August 2007. It is located at Dalal Street, Mumbai, India. In October 2007, the equity market capitalization of the companies listed on the BSE was US$ 1.61 trillion, making it the largest stock exchange in South Asia and the tenth largest in the world.

The Bombay Stock Exchange was established in 1875. Around 4,800 Indian companies list on the stock exchange, and it has a significant trading volume. The BSE SENSEX (SENSitive indEX), also called the "BSE 30", is a widely used market index in India and Asia. Though many other exchanges exist, BSE and the National Stock Exchange of India account for most of the trading in shares in India.

The London Stock Exchange or LSE is a stock exchange located in London, England, United Kingdom. Founded in 1801, it is one of the largest stock exchanges in the world, with many overseas listings as well as British companies. The LSE is part of the London Stock Exchange Group plc.

Its current premises are situated in Paternoster Square close to St Paul's Cathedral in the City of London.