What is a Stock Market?
I have some stock to sell but where do I go?
I got my first shares from my parents who were good enough to give me a start in life. Inheriting shares and stocks is one of the major ways that one can acquire them. Some individuals are lucky enough to work for companies that offer shares as part of their pay packet.
However, most investors get their shares and stocks from the stock market. As the name suggests, a stock market is simply a place where you can buy and sell shares in a company. For the investor, the simplest definition of a stock market is where you go to buy and sell stocks of a company that you are interested in trading.
Stock markets were created for raising funds for companies to finance their operations. Going to a bank to borrow funds in order to improve a company’s performance is expensive. The company has to pay back the funds in a short time and pay high interest for those funds.
Company owners realised that they could sell portions of their companies to other individuals and raise the same funds without the high cost of borrowing. It must have been easy to source individual funds from family members and friends but if these companies were to grow, they needed other members of the public to sell the shares to.
This led to the creation of stock markets. Stock markets can be compared to a local market where you go to buy all the food that you need for your home and where the farmer sells the food to you. Stock markets do not sell you food but sell you stocks or part ownership in them instead.
A stock market or a stock exchange is where all the stocks in a public company are bought and sold. In the UK, we have the London Stock Exchange. It is important to note that a country can have a number of stock exchanges but a company can only be bought or sold in one stock exchange. If the London Stock Exchange did not exist, we might all have been forced to buy our shares in the newspaper.
The stock market participants now range from individual stock investors to large hedge funds. It is no longer the domain of very rich individuals. The transfer and exchange of these shares is normally done by stockbrokers who ensure that the exchanges are done quickly and efficiently. A visit to a stock market is not necessary anymore as brokers can handle all transactions for you.
Over time, stock markets have become very important indicators of how a country’s economy is doing. Since most companies in the UK are traded in the London Stock Exchange, it can be easily assumed that if the stock market value is falling, then the UK economy is not doing well. Large investors use the stock exchange to gauge the viability of a country’s economy.