Eleanor Finch
The stock market is a complex ecosystem of buyers and sellers of stocks (also called shares), which represent ownership claims on businesses. It plays a crucial role in modern economies by enabling money to flow between investors and companies. Major stock market indexes, such as the Dow Jones Industrial Average or the S&P 500, represent large sections of the market and are often used as indicators of its overall health. The performance of these indexes is influenced by various factors, including trading prices, market ratings, and information about stock exchange dynamics. The stock market includes various participants, such as individual and institutional investors, regulatory bodies, and publicly traded corporations. It operates through a network of exchanges, including well-known ones like the New York Stock Exchange (NYSE) and NASDAQ, as well as smaller, specialized entry markets. While the term stock market primarily refers to the trading of stocks, other securities such as bonds, commodities, and exchange-traded funds (ETFs) are also traded in these markets.
| Characteristics | Values |
|---|---|
| Number of publicly traded companies worldwide | 58,000+ |
| Examples of major stock exchanges | New York Stock Exchange (NYSE), NASDAQ, London Stock Exchange, Tokyo Stock Exchange, Shanghai Stock Exchange, Euronext, Hong Kong Stock Exchange, Frankfurt Stock Exchange |
| Number of stock exchanges worldwide | 60 |
| Number of exchanges with a market capitalization of $1 trillion or more | 16 |
| Percentage of global market capitalization accounted for by exchanges with a market capitalization of $1 trillion or more | 87% |
| Total market capitalization of all publicly traded stocks worldwide in 2023 | $111 trillion |
| Percentage increase in the value of world stock markets in 2021 | 26.5% |
| Total value of world stock markets in 2021 | $22.3 trillion |
| Percentage of the global market accounted for by developing economies in 2021 | 45% |
| Percentage of the global market accounted for by developed economies in 2021 | 37% |
| Percentage of the global market accounted for by America in 2021 | 16% |
| Percentage of the global market accounted for by Africa in 2021 | 2% |
| Examples of market participants | Individual retail investors, institutional investors (e.g. pension funds, insurance companies, mutual funds, banks), publicly traded corporations, robo-advisors |
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What You'll Learn
Stock exchanges
A stock exchange is a platform where stockbrokers and traders can buy and sell securities, such as shares of stock, bonds, and other financial instruments. Stock exchanges may also provide facilities for the issue and redemption of such securities and instruments, as well as capital events, including the payment of income and dividends.
The stock market enables money to move between investors and companies. People purchase stocks for various reasons. Some hold on to shares, looking for income from dividends. Others look for low-priced stocks that are likely to gain value so that they can sell at a profit.
There are 60 stock exchanges worldwide, with 16 exchanges having a market capitalization of $1 trillion or more, accounting for 87% of global market capitalization. The major stock exchanges include the New York Stock Exchange (NYSE), NASDAQ, the London Stock Exchange, the Tokyo Stock Exchange, the Shanghai Stock Exchange, the Hong Kong Stock Exchange, Euronext, and the Frankfurt Stock Exchange.
In recent years, the advent of electronic trading has revolutionized stock exchanges worldwide. Platforms such as NASDAQ's electronic system have enabled higher trading volumes and more accurate and controlled transactions.
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Shares
The concept of trading company shares is not new, as it dates back to the Roman Republic. However, the first formal stock exchange was established in Amsterdam in 1602. Today, there are over 58,000 publicly traded companies worldwide, and the total market capitalization of all publicly traded stocks rose to US$111 trillion by the end of 2023.
The stock market also includes other securities, such as bonds, exchange-traded funds (ETFs), and commodities like oil, steel, and wheat. These can be traded on exchanges or through over-the-counter (OTC) markets, which involve direct negotiations between buyers and sellers without the same level of regulation as formal exchanges.
Overall, shares are a fundamental aspect of the stock market, providing investors with ownership claims and the potential for profit, while also allowing companies to raise capital and facilitate economic growth.
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Buyers and sellers
The stock market is a platform for investors to buy and sell investments, most commonly stocks, which are shares of ownership in a company. Buyers and sellers in the stock market include individual and institutional investors, publicly traded corporations, stockbrokers, and stock exchanges.
Buyers
Individual investors include anyone who buys stocks for themselves. Institutional investors are large entities that manage large amounts of money and often have a significant influence on the market. Examples include pension funds, mutual funds, insurance companies, and hedge funds.
Sellers
Corporations sell their shares to investors through Initial Public Offerings (IPOs) in the primary market. Once a company goes public, its stock can be traded in the secondary market via exchanges or "over the counter."
Stockbrokers, who may also act as financial advisors, buy and sell stocks for their clients, who are typically institutional investors or individual retail investors. Stock exchanges are marketplaces that facilitate the buying and selling of stocks among investors. Examples of well-known stock exchanges include the New York Stock Exchange (NYSE), NASDAQ, and the London Stock Exchange.
Stock exchanges often function as "continuous auction" markets, where buyers and sellers come together at a central location such as the floor of the exchange, or they may use an electronic system to process transactions. With thousands of buyers and sellers, there is always someone willing to buy or sell shares for the right price.
Influencing Factors
Several factors can influence the buying and selling of stocks. The supply and demand for stocks drive the price of stocks, and this demand and supply are influenced by various factors. For example, high trading prices, market ratings, information about stock exchange dynamics, and financial institutions can all impact individual and corporate participation in the stock market.
Additionally, the psychology of investors plays a role in their buying and selling decisions. During times of market stress, investors may engage in herding behaviour, where they follow the actions of the majority. For instance, investors may be reluctant to buy stocks in a company if they perceive that most other investors are selling.
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Market indexes
A market index is a group of stocks or other asset classes that track the performance of a market segment. They are a simplified way for investors to gauge the performance of a large market sector without having to examine each asset in that index. Market indexes are also referred to as stock indexes or stock market indexes.
Stock indexes are a list of investments that represent a segment of the financial market. The calculation of the index value comes from the prices of the investments listed. Some indexes have values based on market-cap weighting, revenue weighting, float weighting, and fundamental weighting. Weighting is a method of adjusting the individual impact of items in an index.
The three most popular stock indexes for tracking the performance of the U.S. market are the Dow Jones Industrial Average (DJIA), S&P 500 Index, and Nasdaq Composite Index. The S&P 500 Index tracks the market moves of around 500 of the largest publicly traded companies in the U.S. The Dow Jones Industrial Average is the oldest U.S. stock index, as well as the most frequently cited one; however, the S&P 500 represents a larger cross-section of the economy. The Nasdaq Composite Index includes all the stocks on the Nasdaq exchange.
Other indexes have more specific characteristics that create a more narrowly targeted market focus. For example, indexes can represent micro-sectors or maturity in the case of fixed income. Indexes can also be created to represent a geographic segment of the market such as those that track the emerging markets or stocks in the United Kingdom and Europe. The FTSE 100 is an example of such an index.
For international markets, the Financial Times Stock Exchange 100 Index and the Nikkei 225 Index are popular proxies for the British and Japanese stock markets, respectively.
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Liquidity
There are two main measures of liquidity: market liquidity and accounting liquidity. Market liquidity refers to the extent to which a market, such as a country's stock market, allows assets to be bought and sold at stable, transparent prices. The stock market is characterised by higher market liquidity. If an exchange has a high volume of trade that is not dominated by selling, the price that a buyer offers per share (the bid price) and the seller's asking price will be fairly close.
Stocks that are traded on a public exchange are considered liquid assets due to the large number of buyers and sellers in the market. Stocks with high volume have a large number of buyers and sellers, making it easier for investors to buy or sell the stock. This high volume is usually identifiable by daily volume, which can be in the millions or even hundreds of millions of shares.
Share turnover is a metric that compares the volume of shares traded with the number of outstanding shares (all the shares held by a company's shareholders). A higher share turnover indicates high liquidity, as investors can more easily buy and sell. The bid-ask spread is another measure of liquidity, which is the difference between the bid price (the price a buyer is willing to pay) and the asking price. When the spread between the bid and ask prices tightens, the market is more liquid; when it grows, the market becomes more illiquid.
Accounting liquidity, on the other hand, measures the ease with which an individual or company can meet their financial obligations with the liquid assets available to them. For an individual, this means having enough cash or marketable assets (like stocks) to meet their obligations. Companies measure liquidity by comparing current assets and debt.
Cash is the most liquid asset, while investment properties are relatively illiquid as they can take a long time to sell. Stocks generally fall on the relatively liquid side of the liquidity spectrum. Liquidity is important because it allows transactions to be completed quickly, even when stock values are dropping.
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Frequently asked questions
The stock market is where investors connect to buy and sell investments, most commonly stocks, which are shares of ownership in a public company.
The major portion of the stock market is made up of large stock market indexes like the Dow Jones Industrial Average or the S&P 500. These indexes represent large sections of the market and their performance is viewed as representative of the entire market.
Major stock exchanges include the New York Stock Exchange (NYSE), NASDAQ, the London Stock Exchange, the Tokyo Stock Exchange, the Shanghai Stock Exchange, the Hong Kong Stock Exchange, Euronext, and the Frankfurt Stock Exchange.
Major participants in the stock market include individual retail investors, institutional investors (like pension funds, insurance companies, mutual funds, banks, and other financial institutions), and publicly traded corporations trading in their own shares.
