I’m sure you have heard of the stock market. Almost everywhere you look online these days someone is trying to tell you how to get rich trading stocks. The news talks about stocks, you can find people talking about stocks on Instagram and Twitter. Even TikTok has jumped on the stock market bandwagon. But what is the stock market and how does it work?
What is a stock?
In order to define what the stock market is first we need to find out what a stock is.
A quick google search of “what is a stock?” will lead you to www.investopedia.com. Here they say “A stock or share (also known as a company’s “equity”) is a financial instrument that represents ownership in a company or corporation and represents a proportionate claim on its assets (what it owns) and earnings (what it generates in profits).”
“Stock ownership implies that the shareholder owns a slice of the company equal to the number of shares held as a proportion of the company’s total outstanding shares. For instance, an individual or entity that owns 100,000 shares of a company with one million outstanding shares would have a 10% ownership stake in it. Most companies have outstanding shares that run into the millions or billions.”
So simply put stocks are…
- also known as shares.
- Shares represent ownership of a company.
- That ownership entitles the owner to a percentage of the company’s assets and earnings.
- The amount of a company a shareholder owns is directly proportional to the number of shares they own in relation to the total number of shares outstanding
- If a company has 1 million shares outstanding and you own 100,000 shares of that company you will own 10% of that company. (100,000/ 1,000,000 = 0.1 = 10%)
- Companies usually have millions or billions of shares outstanding. For example, Apple (AAPL) has 16.79 billion shares outstanding.
Now that we understand what a stock is let’s define a market.
What is a market?
After googling “what is a market?” I again found myself on www.investopedia.com, they say “A market is a place where two parties can gather to facilitate the exchange of goods and services. The parties involved are usually buyers and sellers. The market may be physical like a retail outlet, where people meet face-to-face, or virtual like an online market, where there is no direct physical contact between buyers and sellers.”
“The market establishes the prices for goods and other services. These rates are determined by supply and demand. Supply is created by the sellers, while demand is generated by buyers. Markets try to find some balance in price when supply and demand are themselves in balance.”
So a market is…
- a place where two parties can exchange goods and services.
- The two parties are the buyers and the sellers.
- Markets can be physical (supermarket) or virtual (Ebay).
- Markets help establish the price for goods and services.
- Prices are determined by supply and demand.
- Sellers create the supply.
- Buyers create demand.
- When supply is greater than demand prices will fall.
- When demand is greater then supply prices will rise.
- The price will find a balance when the supply and demand are balanced.
Now that we have defined what a stock is and what a market is we can define the stock market.
So what is the stock market?
The stock market…
- is a place where buyers and sellers can meet to exchange stocks or shares.
- Stocks represent ownership of a company.
- As an owner of the company the shareholder is entitled to a proportionate percentage of the company’s assets and earnings.
- The price of a particular stock will be determined by the supply and demand of that stock.
- The supply of a stock will be provided by the sellers, the demand will be provided by the buyers.
- If the supply of a stock is greater than the demand the price will decrease.
- If the demand for a stock is greater than the supply the price will increase.
Examples of stock markets/exchanges
Stock markets can be physical places or they can be virtual. According to www.investopedia.com, The first stock markets appeared in Europe in the 16th and 17th centuries, mainly in port cities or trading hubs such as Antwerp, Amsterdam, and London. In the late 18th century, stock markets began appearing in America, notably the New York Stock Exchange (NYSE),
Today there are stock exchanges throughout the world such as:
- The Australian Securities Exchange (ASX)
- The Tokyo Stock Exchange (TSE/TYO)
- The Shanghai Stock Exchange (SSE)
- The London Stock Exchange
- And the Frankfurt Stock Exchange