What Is The Stock Market?

Answering a question such as, "What is the stock market?" can and should be relatively easy, but it also might be frighteningly complicated as well.

On the surface, a stock market enables the trading - buying and selling - of stocks. Once upon a time, and not all that long ago in fact, this was a geographical place where people would come together between certain times to make their trades. In this respect, a stock market resembled any other form of market. In some places, stock markets still have a fixed location, but in the modern internet and technological world which we now inhabit, it can be a network of computers all enabling buying and selling at agreed prices. These fixed location markets use a system known as 'open outcry'. If you have ever seen pictures on television of a commodities market with vast crowds of people - usually men - waving their arms furiously and shouting, then you have some idea of the open outcry environment.

Describing the 'stock' element is much trickier however. In the USA, stock is generally considered to be a part ownership in a company. These companies are 'listed' or 'quoted' which means that they are publicly traded and anyone can purchase a part ownership - should they choose to. In other places, the UK for example, this would be known as a share or equities.

There are mechanisms which enable stock to be traded privately. This would normally happen between two large companies or fund managers and would involve very large holdings. It would be impracticle for the average investor to privately trade 100 or 1,000 shares with another investor. Such trades are often mentioned in market reports in daily newspapers. This is because such large scale transactions frequently involve either large minority interests or majority holdings changing hands.

Also quoted on most major exchanges are debt instruments. These debts are known as 'bonds' and money will be borrowed by either central or local government and corporations. These debts will have a predetermined term, for example 20 years. At that time, the loan will be repaid at a predetermined price. Until that date, interest will be paid to the bond holder. The price of a bond is not fixed in the market which means that their capital value will fluctuate as will the amount of interest paid (as a percentage).

In recent years, the role of some stock exchanges has changed to include derivatives - futures and options to you and I. These are part of a highly complex world which will not be explained here, but they are an enormous economy unseen by the population at large.

The largest companies quoted on an exchange will also be members of an index. Examples are the FTSE 100, CAC40 or Dow Jones Industrial Average. To give an overview of the direcion of the market, this index figure is quoted by news and media and helps to generalise whether the market was or is 'up' or 'down'. These indices are weighted which means that the largest companies are worth far more in terms of percentages than the smaller firms. By definition, this means that the movement of an index therefore, most accurately reflects the movements of the top few companies.