What is the Stock Market?

//What is the Stock Market?
What is the Stock Market? 2017-10-10T07:50:15+00:00

Definition: The stock market is a marketplace where securities and ownership stakes in organizations and companies are bought, sold, traded, and issued.

What Does Stock Market Mean?

What is the definition of stock market? Established before the inception of the United States itself, the US stock exchange has long been a place where company values have been determined by the sale of their stakes. There are several different US stock exchanges such as the NYSE and Nasdaq. The US is not the only country with an exchange; however, many nations have their own stock exchanges. International exchanges can impact the global positively and adversely depending on the domestic economies involved. For example, if China’s stock market were to collapse, then all of China’s investors would be adversely affected.

Most large companies use the stock exchange to raise capital for expansion and business operations. For example, Facebook’s IPO raised about $16B for the company. Facebook does not however make any money on individuals trading its stock on the open market after the initial public offering. This is a common misconception. Companies use the exchange to issue new shares and securities to investors. This is the only time the company actually makes money from the exchange.

All other transactions of Facebook stock are between private investors. Thus, when a investors buy and sell Facebook shares on the market, they aren’t transacting with the company at all. They are buying the shares from another private investor. Thus, if the value of Facebook stock increases 10 percent in one week, the company doesn’t actually make any money. The investors who own the individual shares profit because their investment is now worth 10 percent more.

Let’s take a look at an example.

Example

Fred owns Fred’s Pizza. He has been extremely successful and wants to expand nationwide with his franchise company. The only problem is Fred doesn’t have the funds to do so. He decides to take his company public in order to raise enough money. He issues 10,000,000 new shares at his initial public offering and raises $119,000,000.

Now that the company is public, anyone can become an investor in Fred’s Pizza for only $19 per share.

Summary Definition

Define Stock Markets: Stock market means an exchange where company shares, securities, and other financial instruments are bought, sold, and traded.