Understanding the Stock Market While today it is possible to buy every little thing online, there is generally a designated market for each commodity. As an example, people drive to city outskirts and farmlands to buy Christmas trees, visit the area timber market to buy wood and other necessary material for home furniture and renovations, and visit stores like Walmart because of their regular grocery supplies.
Such dedicated markets serve as a platform where numerous buyers and sellers meet, interact and transact. Since the amount of market participants is huge, one is assured of a reasonable price. For example, if there is just one seller of Christmas trees in the entire city, he will have the liberty to charge any fee he pleases since the buyers will not have anywhere else to go. If the total amount of tree sellers is significant in a typical marketplace, they must compete against one another to attract buyers. The buyers will undoubtedly be spoiled for choice with low- or optimum-pricing, making it a good market with price transparency. While shopping online, buyers compare prices provided by different sellers on a single shopping portal or across various outlets to have the best deals, forcing the many online sellers to offer the very best price.
Functions of a Stock Market
A stock market primarily serves the following functions:
Fair Dealing in Securities Transactions: Concerning the standard rules of demand and supply, the stock exchange needs to ensure all interested market participants have instant access to data for many buy and sell orders, thereby helping in the fair and transparent pricing of securities. Additionally, it should also perform efficient matching of appropriate buy and sell orders.
For example, there could be three buyers who’ve placed orders for buying Microsoft shares at $100, $105, and $110, and there could be four sellers willing to sell Microsoft shares at $110, $112, $115, and $120. The exchange (through their computer-operated automated trading systems) needs to ensure the very best buy and best sell are matched, which in cases like this reaches $110 for the given quantity of trade.
Efficient price discovery
Stock markets need to aid an efficient mechanism for price discovery, which describes the act of deciding the appropriate price of protection and is generally performed by assessing market supply and demand and other factors associated with the transactions.
Say, a U.S.-based software company is trading for $100 and features a market capitalization of $5 billion. A news item will come in that the EU regulator has imposed an excellent of $2 billion on the business, which essentially ensures that 40 percent of the business’s value might be wiped out. While the stock market could have imposed a trading budget range of $90 and $110 on the business’s share price, it should efficiently change the permissible trading price limit to allow for for the possible changes in the share price, else shareholders may struggle to trade at a reasonable price.
Liquidity Maintenance: While getting the number of consumers and sellers for a particular financial safety is unmanageable for the stock market, and it takes to ensure that whosoever is qualified and ready to trade gets instant access to put orders that will get executed at a fair price.
Security and Validity of Transactions: While more participants are essential for efficient working of a market, the same market needs to ensure all participants are verified and remain compliant with the mandatory rules and regulations, leaving no room for default by some of the parties. Additionally, it should ensure that all associated entities operating available in the market should also abide by the rules and work within the legal framework given by the regulator.
Support All Eligible Forms of Participants
A marketplace is created by many different participants, such as market makers, investors, traders, speculators, and hedgers. Each one of these participants operates in the stock market with various tasks and functions. For instance, an investor might get stocks and maintain them for a long haul spanning a long time, while a trader may enter and exit a situation within seconds. A market maker provides necessary liquidity available in the market, while a hedger may want to trade in derivatives to mitigate the risk involved with investments. The stock market should ensure that all such participants can operate seamlessly, fulfilling their desired roles to provide the market continues to work efficiently.
Alongside wealthy and institutional investors, a large number of small investors are also served by the stock market because of their tiny amount of investments. These investors could have limited financial knowledge and may not be fully conscious of the pitfalls of investing in stocks and other listed instruments. The stock exchange must implement necessary measures to offer mandatory protection to such investors to shield them from financial loss and ensure customer trust.
For example, a stock exchange may categorize stocks in various sectors relying on their risk users and allow confined or no trading by everyday investors in high-risk stocks. Exchanges often impose constraints to stop individuals with confined money and knowledge from stepping into risky bets of derivatives.
Listed companies are primarily regulated, and their dealings are monitored by market regulators, like the Securities and Exchange Commission (SEC) of the U.S. Additionally, exchanges also mandate specific requirements – like, timely filing of quarterly financial reports and instant reporting of any relevant developments – to ensure all industry players become aware of corporate happenings. Failure to stick to the regulations may result in trading by the transactions and other disciplinary measures.
A stock market is just a similar designated market for trading various securities in a controlled, secure, and managed environment. Since the stock market brings together a massive selection of many market participants who wish to buy and sell shares, it ensures fair pricing practices and transparency in transactions. While earlier stock markets used to issue and deal in paper-based physical share certificates, present-day computer-aided stock markets operate electronically.