A stock exchange or stock market is the physical or virtual place where the issuing and trading of shares takes place. The stock market is one of the most important components of an economy, as it provides companies with capital in exchange for giving investors partial ownership of the firm.
Stock markets can be split into two sections:
- the primary market, where new issues are first sold through Initial Public Offerings (IPOs);
- the secondary market, where all subsequent trades of the issued stocks takes place.
The fundamental role of exchanges is that of bringing together buyers and sellers in an organized manner.
In terms of market capitalization, the two biggest stock exchanges are the New York Stock Exchange (NYSE), founded in 1792 and headquartered on Wall Street, and the NASDAQ, founded in 1971, which initially was famous for listing major technology firms like Apple and Microsoft.
The SEC is charged with overseeing the US stock markets, protecting investors, maintaining fair and efficient markets and facilitating capital formation.
There are two types of stocks frequently traded on markets:
- listed securities, that need to meet the reporting regulations of the SEC as well as the requirements of the exchanges on which they are listed;
- Over-The-Counter (OTC) securities, traded directly between buyers and sellers and not listed on any exchange.
OTC securities do not need to comply with SEC reporting requirements; as a result, finding credible information on them can be really difficult. The lack of information makes investing in this kind of securities similar to investing in private companies.
There are many different people working on stock markets, including brokers, traders, analysts, portfolio managers and investment bankers. They are all strongly intertwined and collaborate to make the market run effectively.
A useful way to know how a stock market is performing is through the consulting of an index of stocks: indexes are used to measure changes in the overall stock market or in a segment of it. There are many different indexes, each made up of a different pool of stocks; in the United States, for examples, the main stock indexes are the Dow Jones Industrial Average (DJIA), the Standard and Poor’s 500 (S&P 500) and the NASDAQ Composite Index.
Stock markets allow companies to raise money by offering shares to the public. Through stock exchanges, investor can participate in the financial achievements of the firms, making money thanks to dividends and by selling appreciated stocks at a profit, called capital gain.
The first stock market in history was founded in 1531 in Antwerp, Belgium. Brokers and moneylenders would meet there to deal in business, government and even individual debt issues, since in that period shares did not exist yet. Companies’ stocks would have started to be issued and traded only almost a century later, with the creation of the Dutch, British and French East Companies.